13-06-2011, 07:31 AM
Business Times - 13 Jun 2011
Understanding the shiny allure of gold
MINDY TAN takes a look at the various factors budding investors should take note of before taking the plunge
I DARE say, you might never look at your grandmother's gold necklaces, rings, and accessories in the same way again. While (yellow) gold seems to have lost some of its lustre within fashion circles, gold as a commodity still retains its charms in the world of investments.
When this love affair began 5,000 years ago, gold was primarily used for adornment and worship. It wasn't till much later that gold was made into coins. While this enhanced its usability as a monetary unit, it was not a perfect solution since these coins were often collected for the sole purpose of accumulating enough gold to melt them down into bullion.
Believe it or not, bullion is still one of the ways you can gain exposure to gold. Other ways include investments via an exchange- traded fund (ETF), index, or trading of futures and options in the commodities market.
Given the fair amount of emphasis placed on futures and options previously, let's take a closer look at the other investment vehicles available for gold.
Physical assets
Is investing in gold as a physical asset a good idea? Sam Goh, wealth coach at Wisdom Capital, suggests that it might be, but only to a certain extent.
'Having investment exposure in physical gold may probably be the most secure way to invest in it,' he says. 'Another major reason is its wealth preserving powers, as gold is unlikely to lose its intrinsic value unlike other paper currencies. Most importantly, investing in physical gold is an effective approach to hedge against inflation and economic crisis by serving as a form of 'insurance'.'
On the other hand, investors who dabble in physical assets have to tackle security and liquidity issues. In addition, investors can only look forward to potential capital gains, with no dividend options.
'For investors who are looking for regular streams of dividend income, investing in physical gold may not necessarily be a good idea (as) physical gold does not offer any dividends (but instead) potentially offers capital appreciation,' Mr Goh adds. 'This is clearly a downside that investors will have to take note of if they are dependent on dividend payments to finance further investments.'
Gold index
Commodities and precious metals have traditionally been benchmarked and priced against the greenback, according to Mr Goh, resulting in the gold price reflecting fluctuations of the US currency rather than actual shifts in the fundamentals of gold.
To counter this, the SPM Gold Index is measured against a basket of 11 major currencies, which are equally weighted. The 11 currencies in this basket represent countries that play a major role in the global supply and demand of gold by their capacities as producers and/or consumers.
'In this case, it is a worthwhile consideration for investors as the SPM Gold Index will serve as a more relevant and objective benchmark for them to monitor their existing gold investment holdings and track their performances,' says Mr Goh. 'The index will also allow them to spot trend patterns and identify any fundamental shifts in gold more accurately and objectively.'
Exchange-traded funds
Gold ETFs on the other hand allow investors to buy into a fund that is backed by physical gold, and/or gold futures. The buyer may choose to sell the futures at any time, hence hedging their risk of holding cash.
'One of the key highlights of investing into gold ETFs is that it offers liquidity to investors should the need arise,' says Mr Goh. 'Investors can exit their gold ETFs position in the financial market very quickly without much hassle.'
'Another key advantage is storage. An investor does not have to fret over any potential storage issues (including monetary issues that may arise through fees paid to insure physical gold),' he adds. On the other hand, the prices of gold ETFs rarely match gold spot commodity prices, says Mr Goh, adding that they are usually lower.
'(Before going into ETFs), investors should seek to understand how these ETFs function and what are the advantages and disadvantages offered to determine whether or not they are appropriate for their needs and investment requirements,' Mr Goh says.
All that glitters is not gold
James Bond fans may remember the scene in Goldfinger where the gold-obsessed villain watches as a laser inches toward a restrained James Bond who is secured to a gold-topped table. Before he leaves, he says: 'This is gold Mr Bond. All my life I have been in love with its colour, its brilliance, its divine eminence.'
While movies like this, including others with gold-obsessed pirates, epitomise the human fascination with gold, the question remains, should young investors invest in gold?
Before joining the gold rush, Mr Goh suggests that young investors weigh their liquidity needs, risk appetite, and investment time horizon. Depending on their individual conclusions, strategic portfolio allocation can range from 10 to a maximum of 15 per cent.
'Physical gold, ETFs, gold mining companies, and gold futures have different characteristics that cater to the needs of both investors and speculators,' he says. 'Hence, it is of vital importance for investors to determine whether they are gold investors or speculators so as to adopt the relevant investment products.'
For gold investors with a longer investment time horizon for instance, investment strategies such as dollar cost averaging and value cost averaging are two relevant and viable investment strategies that should be coupled with relevant fundamental analysis.
The rationale, says Mr Goh, is to take advantage of any price corrections and purchase more units of gold investment for position and enhance returns from the investment accordingly when gold prices rebound.
However, investors should remain disciplined and adhere closely to their respective strategic portfolio allocation by engaging in routine portfolio re-balancing of their investment asset classes.
Investors should also understand the risks, mechanisms, functionality, features, fees, and liquidity of the various gold investment products available before investing, says Mr Goh.
Finally, analyse and look out for changes in the macroeconomic situation, by paying special attention to international economic indicators - inflation, interest rates, energy prices, currency movements, annual global gold supply versus demand - that may have an impact on gold prices.
Understanding the shiny allure of gold
MINDY TAN takes a look at the various factors budding investors should take note of before taking the plunge
I DARE say, you might never look at your grandmother's gold necklaces, rings, and accessories in the same way again. While (yellow) gold seems to have lost some of its lustre within fashion circles, gold as a commodity still retains its charms in the world of investments.
When this love affair began 5,000 years ago, gold was primarily used for adornment and worship. It wasn't till much later that gold was made into coins. While this enhanced its usability as a monetary unit, it was not a perfect solution since these coins were often collected for the sole purpose of accumulating enough gold to melt them down into bullion.
Believe it or not, bullion is still one of the ways you can gain exposure to gold. Other ways include investments via an exchange- traded fund (ETF), index, or trading of futures and options in the commodities market.
Given the fair amount of emphasis placed on futures and options previously, let's take a closer look at the other investment vehicles available for gold.
Physical assets
Is investing in gold as a physical asset a good idea? Sam Goh, wealth coach at Wisdom Capital, suggests that it might be, but only to a certain extent.
'Having investment exposure in physical gold may probably be the most secure way to invest in it,' he says. 'Another major reason is its wealth preserving powers, as gold is unlikely to lose its intrinsic value unlike other paper currencies. Most importantly, investing in physical gold is an effective approach to hedge against inflation and economic crisis by serving as a form of 'insurance'.'
On the other hand, investors who dabble in physical assets have to tackle security and liquidity issues. In addition, investors can only look forward to potential capital gains, with no dividend options.
'For investors who are looking for regular streams of dividend income, investing in physical gold may not necessarily be a good idea (as) physical gold does not offer any dividends (but instead) potentially offers capital appreciation,' Mr Goh adds. 'This is clearly a downside that investors will have to take note of if they are dependent on dividend payments to finance further investments.'
Gold index
Commodities and precious metals have traditionally been benchmarked and priced against the greenback, according to Mr Goh, resulting in the gold price reflecting fluctuations of the US currency rather than actual shifts in the fundamentals of gold.
To counter this, the SPM Gold Index is measured against a basket of 11 major currencies, which are equally weighted. The 11 currencies in this basket represent countries that play a major role in the global supply and demand of gold by their capacities as producers and/or consumers.
'In this case, it is a worthwhile consideration for investors as the SPM Gold Index will serve as a more relevant and objective benchmark for them to monitor their existing gold investment holdings and track their performances,' says Mr Goh. 'The index will also allow them to spot trend patterns and identify any fundamental shifts in gold more accurately and objectively.'
Exchange-traded funds
Gold ETFs on the other hand allow investors to buy into a fund that is backed by physical gold, and/or gold futures. The buyer may choose to sell the futures at any time, hence hedging their risk of holding cash.
'One of the key highlights of investing into gold ETFs is that it offers liquidity to investors should the need arise,' says Mr Goh. 'Investors can exit their gold ETFs position in the financial market very quickly without much hassle.'
'Another key advantage is storage. An investor does not have to fret over any potential storage issues (including monetary issues that may arise through fees paid to insure physical gold),' he adds. On the other hand, the prices of gold ETFs rarely match gold spot commodity prices, says Mr Goh, adding that they are usually lower.
'(Before going into ETFs), investors should seek to understand how these ETFs function and what are the advantages and disadvantages offered to determine whether or not they are appropriate for their needs and investment requirements,' Mr Goh says.
All that glitters is not gold
James Bond fans may remember the scene in Goldfinger where the gold-obsessed villain watches as a laser inches toward a restrained James Bond who is secured to a gold-topped table. Before he leaves, he says: 'This is gold Mr Bond. All my life I have been in love with its colour, its brilliance, its divine eminence.'
While movies like this, including others with gold-obsessed pirates, epitomise the human fascination with gold, the question remains, should young investors invest in gold?
Before joining the gold rush, Mr Goh suggests that young investors weigh their liquidity needs, risk appetite, and investment time horizon. Depending on their individual conclusions, strategic portfolio allocation can range from 10 to a maximum of 15 per cent.
'Physical gold, ETFs, gold mining companies, and gold futures have different characteristics that cater to the needs of both investors and speculators,' he says. 'Hence, it is of vital importance for investors to determine whether they are gold investors or speculators so as to adopt the relevant investment products.'
For gold investors with a longer investment time horizon for instance, investment strategies such as dollar cost averaging and value cost averaging are two relevant and viable investment strategies that should be coupled with relevant fundamental analysis.
The rationale, says Mr Goh, is to take advantage of any price corrections and purchase more units of gold investment for position and enhance returns from the investment accordingly when gold prices rebound.
However, investors should remain disciplined and adhere closely to their respective strategic portfolio allocation by engaging in routine portfolio re-balancing of their investment asset classes.
Investors should also understand the risks, mechanisms, functionality, features, fees, and liquidity of the various gold investment products available before investing, says Mr Goh.
Finally, analyse and look out for changes in the macroeconomic situation, by paying special attention to international economic indicators - inflation, interest rates, energy prices, currency movements, annual global gold supply versus demand - that may have an impact on gold prices.