Gold - The Worst Form Of Investment Over The Last 30 Years

Gold - The Worst Form Of Investment Over The Last 30 Years

By : Charlie Lau Suan Liat

September 2010 saw gold hit an all-time high of over US$1,300 an ounce. Many reasons, ranging from the quantitative easing of debts in US, UK & Japan to expand their central banks’ balance sheets, to the “currency warfare” between the US$ and major Asian currencies, have prompted investments in equities and gold to lock-in weaknesses in currencies. This resulted in gold price being chased up to the all-time high.

For investors looking at short-term gains or speculating in gold, there are reasons to be bullish on this “feel-good metal”. Banks & commodity brokers here in Singapore are already bracing themselves for heavy trading in the bullion futures. As reported by The Straits Times on 30 September 2010, Chief Executive Thomas McMahon of the Singapore Mercantile Exchange mentioned that “BNP Paribas, Citigroup, Credit Suisse, JPMorgan and Standard Chartered are currently expanding their bullion trading desks.”

With JPMorgan’s gold vault being completed at the Freeport near Changi Airport, gold trading wannabes can expect more countries to trade gold in Singapore. The advantages are plenty. More gold are mined in the Australasia regions than in America or Europe. So, keeping the gold safely in nearby Singapore makes sense. Gold futures trades have to be settled in physical gold on due date. Hence, it also makes sense keeping the gold in Singapore than keeping it in London or in New York for the futures settlements.

For the longer term, would gold continue to appreciate in value? To answer this question, we have to qualify how long is long? Then, we have to decide whether or not the rise in gold price would be offset by the depreciation of one’s lock-in currency in the metal.

To start off, let us look at gold’s price 30 years ago in US$ that is locked in S$. In 1979, gold’s high was US$880 an ounce. Now, it is US$1,300. For the last 30 years, gold appreciated US$420 per ounce or 48%. 30 years ago, US$ to S$ was about US$1 to S$2.40. Now, it is US$1 to S$1.31 or minus 45%.

One ounce gold in 1979 @ US$880 @ the rate of S$2.40 cost S$2,112.

One ounce gold in Sep-10 @ US$1,300 @ the rate of S$1.31 cost S$1,703.

After 30 years, net loss in gold would be S$409 or -19%.

One year from now, would gold appreciate in price? Most would agree that with inflation and the weakness of the US$, gold would most likely appreciate in price. As one ounce of gold now is US$1,300, a Singaporean investor would have to pay S$1,703, at the exchange rate of US$1 to S$1.31.

Assuming one year from now, gold price appreciates 10% to US$1,430 (a one-year view from the London Bullion Market Association - The Straits Times, 30 September 2010). Assuming also, one year from now, the US$ versus S$ rate drops 10% - US$1 to S$1.18. One year from now, one ounce of gold would then cost S$1,687, representing a loss of S$16 (the 10% drop in US$/S$ rate and the 10% rise in gold one year from now are subjective and for the purpose of illustration only).

This illustration shows that although gold may appreciate in price, an investor may not necessary make money if the US$ is weak against the lock-in currency.

Note:
The cheapest way to invest in gold (in terms of transaction cost) is to open a Gold Passbook Account with United Overseas Bank (hitherto no other bank provides this service). The buy/sell spread is narrowest compared to the gold futures quote. No commission is levied (for details, please check with UOB).

Speculating gold futures or any futures is high-risk gambling with a deposit of as little as 5% collateral or less. Any slight movement in the metal price against the speculator would cause his position to be automatically closed by his broker resulting in the loss of all his collateral.