Investing in gold: pros & cons; hedging & which Malaysian Gold Investment Account is best
Updated: Sep 6, 2017
What is Gold investing?
Gold is a precious metal that has some ornamental and industrial use. Historically, gold was used as a form of currency until in the 1970s when the United States followed by other countries unpegged currency from gold transitioning to a fiat currency system. Gold today is a commodity driven by supply and demand and subject to speculation.
Should you invest in Gold?
Arguments for Gold Investing
- Historically gold holds its value in times of inflation, deflation & political/economical uncertainty
- Gold has performed well (10 years: +111.7; 5 years: +9.6%)
- There is a continued increasing demand of gold driving up prices especially from India, China & western investors who increasingly see gold as part of their portfolio
Arguments against Gold Investing
- Only a very small % of gold is used for actual industrial/decorative purposes & has little utility value. Production vastly outweighs usage.
- Gold is a commodity & you are basically placing a bet that someone will pay more for it in the future (bigger fool theory)
- One ounce of gold today & one ounce of gold 1000 years in the future will be the same one ounce. It produces neither dividends nor income.
- Gold very long term overall performance is at a low 3%.
Is Gold really an Inflation Hedge?
- Gold is not a hedge against short-term inflation (no correlation)
- Gold is a hedge for long-term inflation (but long term being relative that it may be more than the investor’s natural lifetime)
- Gold provides a good hedge in times of major economic catastrophe and/or times of a high magnitude of fear
- In short: Maybe in long term/times of fear
Is Gold a Currency Hedge?
- Gold has been historically proven to have no correlation movement with currencies
- Gold moves in unison vs all currencies
- In short: No
Is Gold a Stock Market Hedge?
- Gold has been historically proven to have a positive correlation with equities
- In short: No
What affects the Price of Gold?
- Common believe that is affected by supply & demand (partially true)
- Economic uncertainty & dampened market sentiments (gold price increases)
- Inverse relation with US$ strength (US$ up, gold down; US$ down, gold up)
- E.g. Fed cuts rates: USD declines & gold goes up
How much Gold in my Portfolio?
- “Experts” differ in viewpoint with some recommending as low as none to as high as 10% of your investment portfolio
- Range of 1-5% of portfolio would be recommended if for viewpoint of inflation hedging
- If you’re buying physical gold, at least 100g (3.21 ounces) to be sizable & for ease of physical gold movement (if necessary)
What is the best Gold Investment Account (GIA)?
Comparison between CIMB Gold Deposit Account, Maybank Gold Investment Account, Public Bank Gold Investment Account, and UOB Gold Savings Account.
- Convenience is a factor depending on your existing bank account especially for online buy/sell transactions
- Public Bank offers the lowest physical withdrawal size of 50g if you are concerned on the need to withdraw gold physically
- UOB offers the lowest spread of ~RM3 but has high min initial purchase & transactions must be in multiples of 5g (other banks multiples of 1g)
- Maybank offers a good balanced mix of features with no annual fees but does not offer physical gold withdrawal
- CIMB also offers a good balanced mix of features including physical gold withdrawal but has a very high spread (meaning you’ll lose more money when you sell)
- A way around physical gold withdrawal fees (which may be cheaper) is to sell off the gold & then only purchase physical gold to save you conversion fees
- You pay a significant amount of charges (spread) when buying gold using a GIA.
Should I buy physical gold?
- Pro: You hold it. Even if a financial institution collapses you are safe. Some folks have reported difficulties/red tape in withdrawing physical gold.
- Con: Less liquid
Should I buy from a Gold Exchange Traded Fund
- Buying a Gold ETF gives you exposure to physical gold virtually which is held in vaults.
- Pros: Significantly cheaper costs & liquidity of trading gold.
- Cons: You need access to a US stock trading account (or you can use a local broker albeit higher transaction costs).
- Example: SPDR Gold Trust ETF ($GLD)
What is the difference between a Gold ETF and a Gold Miners ETF?
- Buying a Gold Miners ETF means you are investing in gold mining companies that explore. develop, and produce gold.
- Gold Miners has a high correlation to gold prices but can still diverge (for example if the stock market crashes including gold miners even though gold price goes up).
- Gold Miners may give you a higher level of return with increased volatility compared to gold.
- Example: VanEck Vectors Gold Miners ETF ($GDX)
Silver & Other Precious Metals
Gold is still the mainstream preference but silver is growing in appeal and has more material and industrial applications than gold. Other precious metal options include platinum, and palladium.
Like all commodities though, silver and other precious metals are still highly volatile.