Is gold a good investment?

The Straits Times
27 March 2016

Dr Larry Haverkamp

ALL THAT GLITTERS 
That brings me to today's scam, I mean topic, gold.

Yes, gold has a somewhat unsavoury reputation, probably because of our experience with Ponzi gold schemes. Those promised yields of 20 per cent and 25 per cent, although the money didn't come from earnings. Unknown to anyone, it came from new investors. Like with all Ponzi schemes, new  investments dwindled, and when they did, the fund went broke.

Why are people so in love with gold? Maybe it is that gold is the only yellow-coloured element that cannot be replicated. Many call it beautiful. Besides that, it is transparent with prices that are updated daily in newspapers and on the Singapore Stock Exchange (SGX).

You can buy gold in small gold bars, called pamp gold, that is sold by UOB. You can also buy gold jewellery, although it is not the best investment since much of the value is in the workmanship. A rule of thumb is that your jewellery's price will fall by 50 per cent the moment you walk out of the shop.


QUICK QUOTE 
"All that glitters is not gold. Gilded tombs do worms enfold."
WILLIAM SHAKESPEARE. THE MERCHANT OF VENICE (1596)


If you are still determined to buy, the best option may be a Gold ETF, known as "SPDR Gold Shares". It is one of the 19 ETFs which are EIPs, or exempt investment products.

The other 72 ETFs traded on SGX are SIPs, or specified investment products. These require that the investor be qualified, usually by taking a written test administered by a stockbroker. Who needs that hassle?

Like most ETFs, the expense ratio is low, at only 0.4 per cent per year, which means you pay $4 per year for every $1,000 of your SPDR Gold Shares.

You must also pay a brokerage commission, which is about 0.6 per cent round trip (buy and sell), plus a small spread between the bid and asked price. It is a US dollar ETF, so you will also pay a currency conversion fee, which is hard to know, but I estimate it at 1 per cent.

It gets expensive, but an ETF is still the cheapest, and it is liquid. So you won't need a big mark down in order to sell, like with jewellery.

ON THE DOWNSIDE 
Gold also has drawbacks. Such as its reputation as the curse of India, because people sank a lot of their wealth into gold even though the country is poor. The nation might be better off today if the money had gone into productive investments like roads, factories and education.

A drawback for all commodities. including gold, is that it has no yield. For example, bonds pay interest, stocks pay dividends and property pays rent. Gold, however, has no yield, so all you will get is a capital gain if there is one.

Those gains depend on supply and demand. The supply grows at about 3 per cent per year from newly mined gold, which helps stability. Demand comes mostly from gold jewellery. which is enormous. But it is constant. so it has little influence on price fluctuation.

That leaves sentiment, which is the most important determinant of demand. but it is hard to predict. That is because it depends mostly on whether there is chaos in the world. which pushes investors toward safe havens, like the US dollar and gold.

The problem is it is hard to know when a crisis is about to happen, making gold prices hard to predict. This unpredictability may be the best reason for giving gold a pass and staying with "plain kway teow" investments like stocks, bonds and property.

If you insist on gold, however, you can use your CPF money. It lets you buy gold using up to 10 per cent of investible savings from your ordinary account.

lhaverkarnp@smu.edu.sg
An adjunct professor at SMU, Haverkamp contributes this column weekly to help our readers understand money matters better.