Don’t Dump Gold Just Because GIC Is Bullish

GIC’s director of economics and strategy, Yeoh Lam Keong, made an interesting statement on Tuesday that there will be further weakness in financial markets. He advises investors to go for gold, hold government bonds and currencies such as the yen, yuan and Canadian dollar. The US dollar is to be avoided “like the plague” as the United States monetise their debt by printing money.

That is all rather belated and even, ironical, considering GIC’s multi-billion dollar stakes in Citigroup and UBS. Nevertheless, it serves no purpose crying over spilt milk. As a matter of fact, I don’t believe any investors have been immune in this period of wealth destruction. The world’s richest are collectively poorer, with $2 trillion of wealth vaporized. Warren Buffett sufffered his worst year ever, losing $25 billion, but is still the second richest man.

Remember that successful investing is the result of being right more often than being wrong. Despite some wrong judgments from GIC, I give them a vote of confidence for their bullish calls on gold. A lot of investors actually took the contrarian view (it has proven to be profitable) and dump gold instead.

At first blush, they could be right as gold experienced significant price erosion since March. Some reasons could be margin calls, stop loss orders and fund liquidation as investors pounce on battered, oversold equities.

A Citibank memo which revealed profitable months in January and February also raised investors’ hopes in financial stocks. Then, JP Morgan Chase and Bank of America joined the parade in reporting profitability and all of a sudden, fears of nationalization are swept into the background.

I will think twice about selling gold though. Not because UBS made a bold prediction of gold prices hitting $2500. Such a frothy forecast combined with knowledge of inflation can get one extremely excited about gold’s prospects. However, I am not salivating over any profits. Instead, my faith in gold stems from the fact that it is a safe haven asset.

Gold exist in limited quantity and is valued as a stable element which does not corrode easily. It represent intrinsic wealth that is not a form of debt. Just about every investments, stocks, bonds, real estate, or derivatives rely on the faith and credit of another party. Even cash is based on government fiat, it’s just another certificate of debt and is intrinsically worthless.

Gold has historically provided the best protection against financial catastrophe and upheavals. Investors diversify into gold to protect their portfolio from currency crisis, bank runs, inflation, deflation, recession, and the fear of a crashing stock market.

Past experience in the currency failures of Argentina, Mexico and Uruguay suggested that investors who owned gold still had currency when banks were shut down and customers could not take money out of their own accounts.

Or with geopolitcal tensions and macroeconomic instability expected to rise in future, let’s assume a doomsday scenario of a war and a nation is being overrun by an aggressor – what happens is its currency ends up virtually useless. You can have $1 million in bank deposits, government bonds or cash but it all means nothing to the new regime.

Andecotal war stories tells us that people, especially those on the losing side, hoard gold in preparation for the worst. I am not saying a war is imminent or the army is not prepared, but part of psychological defense is to expect the unexpected. A hungry mob is particularly susceptible to revolutionary ideas like socialism and empirism.

Since attention is diverted away from depressing data like unemployment, bankruptcies, foreclosures, poverty, etc, a war can be good for politicians. It just takes a rogue nation and before you know it, a war is on our doorstep.

Even if everybody survive this recession without progressing into the Great Depression or an ugly war, the vigorous contest for natural resources (especially fossil fuels) when the global economy turnaround could present a case for military might to end intractable territorial disputes.

Just in case you are mistaken, I don’t enjoy talking about war, nor relish running into bomb shelters. There are already many pressing issues facing mankind like energy crisis and adverse climate changes, so there is no need to hasten our own destruction with bloodshed.

The pragmatic side of me likes to accumulates gold slowly as a safety precaution. I will just treat any capital gains as a bonus. If you are into active portfolio management, having 5% to 15% in gold is a good idea. This percentage provides balance, diversity and insurance for your portfolio, and excellent long-term profit opportunity.

Ok, now that I have rambled enough about gold, how do we get our hands on the prized asset? Besides buying physical gold (bars and coins) there are other ways to own gold which are discussed below.  Singaporeans can utilize their Central Provident Fund Ordinary Account savings to invest in gold savings accounts or gold certificates.

Don't Dump Gold Just Because GIC Is Bullish

1. Bullion coins and gold bars

Physical gold is extremely liquid and there is no shortage of buyers and sellers. Coins and small bars are appropriate for retail investors who have few hundred or thousand dollars to spare. Unlike paper gold, bars and coins are are subject to goods and services tax (GST), so that is 7 per cent of our investment upfront. After dealing, delivery and ownership costs, it may be in the 10-15% range overall. 

When investors sell physical gold to a bank, expect the institution to charge a price differential on the prevailing gold price as a profit. Take note that you have to buy from reputable institutions as fakes can be destroy your wealth. 

2. Gold mining shares

This means taking a stake in the mining firms. The advantages of a gold mine’s shares is that its value is more sensitive to gold price than physical gold. This is because gold mines are valued on their future cashflows through the life of the mine which depend on reserves, production costs and the value of gold extracted.

However, there could be more risks assoicated with mismanagement, accounting fraud, wrong judgment of mine’s reserves, engineering difficulties, and shareholder sentiment.

3. Exchange-traded fund (ETF)

For retail investors, an ETF offers a convenient way to buy gold with relatively modest sums, and without the custody, storage and insurance charges that typically accompany bullion investments.

ETFs are listed on a stock exchange, and are bought and sold just like shares. Investors need not pay a sales charge, unlike with a unit trust. They are, however, subject to a brokerage charge. Overhead costs are typically a fraction of those for unit trusts.

4. Savings accounts

A gold savings account allows an investor to trade gold. You start with a minimum purchase of 5g of 999.9 fine gold. You can then buy or sell in 1g lots. The customer records his purchases and sales in pocket-sized passbooks as deposits and withdrawals. UOB charges an administration fee that is subject to GST.

5. Jewellery

Jewellery is easy to buy and gives the buyer the enjoyment of wearing something glitzy and is a symbol of status. However, jewellery is only profitable for those who buy at wholesale and sell at retail. It is also good for those in the fashion industry and eBay resellers.

But it’s a poor way of investing in gold. There are high purchase costs and the real value of jewellery often lie in the gemstones, craftsmanship and design. Jewellery is also the most easily stolen form of gold.

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1 Comment

Filed under Stocks, gold

One Response to Don’t Dump Gold Just Because GIC Is Bullish

  1. I am not a big gold fan (basically ever). If I were really rich I would buy some just as a diversification move. But I don’t see the benefit now.

    Another point, that is somewhat obvious but also somewhat profound. Successful investing is actually the result of making more than the market (or at least more than you lose). If all your gains and losses are equal sizes then being right more often then being wrong is important. However, I think the real difference between average and poor investors and successful ones, is more likely the size of gains and losses rather than the percentage of wins versus loses. If you can have a few large gains and keep losses fairly small you can actually lose over 50% of the time and still do very well.

    John @ Curious Cat Investing Blogs last blog post..12 Stocks for 10 Years – March 2009 Update

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