How can I invest in gold?

Dear reader,

A forumer in SGFunds.com asked me to elaborate on how you can invest in gold. In my previous post, “Have you invested in gold?“, I have shared with you that there are a few methods that we can invest in gold. The methods are:

  • Start a Gold Savings Account with UOB
  • Invest in streetTRACKS® Gold Shares ETF
  • Invest in gold mining companies
  • Purchase physical gold bars/coins

Now, let me elaborate on the various methods to give you a better understanding.

Start a Gold Savings Account with UOB
Through an UOB Gold Savings Account passbook, you can buy and sell international gold at prevailing market prices and transact any time during banking hours in units of one gram of gold, subjected to a minimum of five grams per transaction.

Having an UOB Gold Savings Account is to allows you to profit from the price movement of gold. Your gains will not be subjected to Goods and Services Tax (GST) and can be exchanged for cash, whenever the need arises. You will be charged administrative fee (in grams of gold) as low as 0.12 gm per month or 0.25% p.a. on the highest balance per month.

I consider the UOB Gold Savings Account as an investment on paper gold and not physical because transactions are done with cash. This means that you cannot withdraw physical gold instead of cash from your UOB Gold Savings Account. Because there is no physical gold involved, you do not incur charges such as gold storage fees.

If you wish to make a mid term investment on gold, the UOB Gold Savings Account will make a good investment instrument to consider.

Click here to read up more about the UOB Gold Savings Account.

Invest in streetTRACKS® Gold Shares ETF
The streetTRACKS® Gold Shares ETF is an Exchange Traded Fund traded in the Singapore Stock Exchange. It’s primary listing is on the New York Stock Exchange. Units held on both NYSE and SGX are fully fungible.

The streetTRACKS® Gold Shares ETF represents a fractional, undivided beneficial ownership interest in a trust, the primary asset of which is allocated gold. By not requiring investors to take physical delivery of gold, the Gold Shares allow easier access to the gold bullion market at lower costs. The investment objective of the streetTRACKS® Gold Shares is to reflect the performance of the price of gold bullion, less the Trust’s expenses.

You can easily purchase the streetTRACKS® Gold Shares ETF through your stock brokerage just like stocks listed on the SGX. With streetTRACKS® Gold Shares ETF, you can view prices of the ETF and trade them anytime during trading hours.

The streetTRACKS® Gold Shares ETF will make a good investment vehicle for short-to-mid term gold investments.

To read more about streetTRACKS® Gold Shares ETF, click here for more information.

Invest in gold mining companies
Investing in gold mining companies do not represent investing in gold itself, but rather shares in gold mining companies. If the price of gold rises, the profits of the gold mining companies could be expected to rise and as a result, the share price may rise. However, like all share investments, there are many factors to consider and it is not always the case that a share price will rise when the price of gold increases.

Unlike gold bullion, which is regarded as a safe haven asset, gold shares or funds are regarded as high risk and extremely volatile. This volatility is due to the inherent leverage in the mining sector. For example, if you own a share in a gold mine where the costs of production are $300 per ounce and the price of gold is $600, the mine’s profit margin will be $300. A 10% increase in the gold price to $660 per ounce will push that margin up to $360, which actually represents a 20% increase in the mine’s profitability, and potentially a 20% increase in the share price. Conversely, a 10% fall in the gold price to $540 will decrease that margin to $240, which actually represents a 20% fall in the mine’s profitability, and potentially a 20% decrease in the share price. The amplification of gold mining profits during periods of rising prices can cause a gold rush in mining exploration. So far this year, the price of gold has moved up slighly, but the price of gold mining stocks have moved down. One explanation given by analyists is that most of the high yielding gold ore has already been mined worldwide leaving ore that requires more energy to remove the gold and lowering the overall profit of gold mining companies.

In order to reduce this volatility many gold mining companies hedge the gold price up to 18 months in advance. This provides the mining company and investor with less exposure to short term gold price fluctuations, but reduces potential returns when the gold price is rising. The AMEX Gold BUGS Index is comprised of the largest unhedged gold stocks listed on AMEX (BUGS – Basket of Unhedged Gold Stocks). As of January 2007, the two largest stocks listed in the index were Goldcorp and Newmont Mining. The AMEX Gold BUGS Index (ticker symbol “HUI”) has outperformed general gold mining stocks, represented by the Philadelphia Gold and Silver Index (“XAU”), over recent years.

Instead of personally selecting individual companies, some investors prefer spreading their risk by investing in gold mining mutual funds such as the Gold & General Fund by Merrill Lynch, or exchange-traded funds such as the Market Vectors Gold Miners ETF (NYSE: GDX) by Van Eck Global which tracks the Amex Gold Miners Index (“GDM”).

Investing in gold mining companies can be considered either a short term investment and a long term investment based on the investor’s investment objectives.

Purchase physical gold bars/coins
When investing in gold bars and coins, note that you will have to pay a premium on top of the gold price.

In Singapore, you can purchase gold bars and coins from various avenues such as UOB, pawnshops, auction websites, etc. At the moment, the only financial institution that sells gold bars and coins is UOB (Raffles Place branch). I would recommend that you purchase physical gold from UOB as you can be sure that the gold you purchase are authentic. Be sure to keep the receipt.

While the other avenues such as pawnshops, auction websites, etc. allow cheaper gold purchases (because you are purchasing from existing gold owners), it is important to be sure that the gold that you are purchasing, is authentic. One way to ensure that your gold is authentic, would be to buy a fisch instrument.

If you do not have the means to be 100% sure that the gold that you are purchasing is authentic, I advise you to purchase from a safe source, such as UOB.

Investing in gold bars and coins are seen as long term investments as you are looking at around 10% difference between the buying and selling price of physical gold (based on the buy and sell prices of physical gold stated on the UOB website).

You should only invest in physical gold when you intend to hold for at least five to ten years.

Click here to find out about purchasing gold bars and coins from UOB.

Conclusion
The various methods of gold investing that I have shared with you above, are just some of the available methods of investing in gold. There are other methods of investing in gold such as gold futures, gold certificates, etc. that I have not covered because I am not familar with them.

Before you invest in gold, be sure to do your own research. You are investing your own money. Never allow others to make the decision for you.

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