Tip for investors: Go for gold

If there is one asset class that has continued to thrive in the past five years of financial ups and downs, it is gold.

Last week, at the height of the worries over the European and American debt crises, gold soared to hit a record high of US$1,610 an ounce.

Indeed, the price of gold has been climbing steadily since 2007, rising from US$640 per ounce to the current US$1,590 per ounce.

This represents roughly 20 per cent returns a year compounded, making gold one of the best assets to have invested in.

Its attractiveness as an asset class is well-known: Investors mainly use it as a hedge against the traditional asset classes of equities and bonds.

It also helps that gold is a cultural icon, used in many Asian customs such as weddings, making demand for the metal resilient.

For these reasons, analysts believe that all investors should hold gold in their portfolios.

UOB’s director of bullion sales, global markets and investment management, Ms Beh Hsia Wa, said many people invest in gold to deal with problems arising from inflation or a downturn.

‘Gold may be a good approach to balance one’s portfolio as the precious metal has shown strong returns over recent years,’ she said.

‘The fact that it is not correlated with most other assets means that the price of gold is not driven by the same factors that affect the performance of other assets.’

She cited several factors likely to support demand for gold: declining mine output, weaker recycling, gold purchases by central banks, geopolitical tensions and concerns over sovereign debt.

‘Low interest cost has also reduced the opportunity cost of owning gold and makes it a more attractive investment,’ said Ms Beh, noting that US interest rates have hovered at 0.25 per cent since December 2009.

Given that background, gold, which does not pay interest or a yield, becomes attractive.

OCBC vice-president for wealth management Vasu Menon said gold is an asset class for all kinds of investors, not just the wealthy.

But he noted that it is a very volatile asset class and suitable for those with a strong risk appetite.

For instance, the price of gold is strongly inversely related to the strength of the US dollar and global risk appetite.

While both the US dollar and the global economy have been performing weakly lately, there is no ruling out that both might rebound in the years ahead.

‘Even if you have a strong risk appetite and are positive on the outlook for gold, it’s important to make sure that you don’t get carried away and over-invest in it,’ he said.

‘Five per cent to 10 per cent of one’s total investments could be an allocation to consider when investing in gold.’

But for investors who have not yet jumped in, is it too late now that the gold price has hit yet another record high?

Mr Menon said that while it is hard to make a prediction about the price of gold in the short term, the bank is more positive about the outlook in the medium term.

For investors who do want to start investing in gold, there is a multitude of tools one can use.

One can buy physical gold anywhere, from pawnshops to banks.

UOB, for instance, sells gold coins and gold bars – the bank was selling a 1kg gold bar for $62,542 as of Thursday.

Investors can also buy into gold-backed exchange traded funds which can be bought and sold on the stock exchange.

In Singapore, investors can buy and sell SPDR Gold shares, which are listed on the Singapore exchange.

Source: Straits Times (subscribers only)

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