Day to Day, Thoughts

Is Gold a Bad Investment?

Commodities prices tends to go up, especially during war or disaster. Gold is no exception. Gold prices rose in response to the Ukraine War amidst inflation worries. This war is unprecedented in recent history and has far reaching implications for the world and our future. One should not underestimate and label this as just another proxy war between superpowers. Having said that, we hope for peace and recovery for all.

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Recently, two tweets caught my attention and set me thinking about gold as part of one’s portfolio. Peter Schiff lamented in his tweet that gold was up above $2,050 for the first time and CNBC chose to cover Bitcoin which was trading below $39,000. Meanwhile, James from MoneyZG mentioned in his tweet that gold is a waste of time as a good “hedge” because you need a war for it to go up, and as a result, 1% of your portfolio is up while the rest is down.

So who is right? It depends.

Before we continue, let us understand and accept the assumptions, biases and context for this article. I have purchased both gold and cryptocurrency assets and I am impartial to both. This article was written from the aspect of the common folks (the average joe/jane, not some financial guru/expert or seasoned investor or trader) in Singapore, though some of the content might relate to overseas audiences. The article written here are based on my personal thoughts and opinions, they do not constitute or meant to be used as financial advice.

Where to buy gold in Singapore?

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Let us briefly look at some options to purchase gold in Singapore.

Jewellery / Physical Gold (Retail)
The most accessible option. You can head into any jewellery or pawn shop to buy them but do note that not all jewellery are in the form of pure gold. Jewellery might be more expensive than gold bar or coins due to the additional craftsmanship charges. For pure physical gold, you can walk into a gold retailer to buy gold bars or bullion coins. While you can hold it physically in your hands and admire them, you have to consider where to keep it safely.

Gold Exchange Traded Fund (ETF)
Instead of buying physical gold and have a headache over storage and security concerns, you can invest in gold through an ETF that owns, holds and derives its value from holding physical gold. ETFs, like STI ETF or S&P500, have been providing cost-efficient investment solution for the average person. You can consider SPDR Gold Share ETF that is listed on the SGX. You will need a brokerage and a CDP account as a pre-requisite though.

Gold Savings Account
“Eh? Got this kind of things meh?” Yes, but unlike regular savings account, no interest are given out. It offers an easier way to buy and sell gold without worrying about storage and security issues. UOB provides such services but it comes with extra charges. I would recommend using HugoSave. It is much easier and cheaper to use as compared to UOB. You can check out my experience with HugoSave via the links at the bottom of this article.

Cryptocurrencies
Bitcoin? Oh no no no, not this 😀 We are not referring to that digital “gold” but cryptocurrencies pegged to commodities. Similar to stablecoins where 1 coin is peg to 1 US dollar, 1 PAX Gold – PAXG token is backed by one fine troy ounce (t oz) of a 400 oz London Good Delivery gold bar, stored in Brink’s vaults. If you own PAXG, you own the underlying physical gold, held in custody by Paxos Trust Company. So if you are already knee deep in crypto land, this can be another option for you.

But what makes this option interesting is that if you hold it in either Crypto.com or Gemini, you can park it under their Earn feature to earn interest (starting from 0.5% APY at this time of writing). This is something that is not possible for the above options, but it is more risky.

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Why gold?

Gold is a precious metal that has been around for centuries and is universally accepted as an alternative to money. Besides its role as an investment, it is also a raw metal for electronic products such as computer processors. Some people believe it to be a good hedge against inflation. Gold is a tangible asset which you can own physically as compared to stocks, bonds or Bitcoin. It is global accepted and recognized, you can use it anywhere. And it looks really nice and shiny.

Why not gold?

Long term returns tend to be poor, and safely storing physical gold can be difficult. It will not provide a steady source of income like dividend stocks. If you own a gold bar for 30 years, you still own the same gold bar. It might be more “expensive” as compared to 30 years ago but that is because the value of the dollar has gotten smaller. If you own a company stock for 30 years, there is a chance that it will worth X times more. In a way, you are losing out the opportunity to make more money if you bought gold instead of Apple stocks. Contrary to popular beliefs, some people think it is not a good hedge against inflation.

Scenarios

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Let’s have a very simplistic assumption here. Imagine we are in stagflation, war is raging in Europe and there are food supply shortages. No one knows when good days are coming.

Assume that we have Portfolio A which has 5% Gold and Portfolio B which has 5% Bitcoin. None of the portfolios have both Gold and Bitcoin. Both portfolio have equal ratio of Cash, Stocks and Bonds. Here are some questions to ask for each of the scenarios listed below.

Scenario #1 – Something happened and you need a lot of cash urgently

  • Would having gold in Portfolio A give you more options and flexibility in liquidity?
  • Are you fine with selling your stocks or Bitcoin that are in the red, at a loss in Portfolio B?
  • Are you really comfortable in doing the above to get the cash?

Scenario #2 – The stock or cryptocurrency that you have conviction is at a good price

  • Would having gold in Portfolio A give you more options/confidence to buy the dip?
  • Are you fine with selling your stocks (at loss) or using cash in Portfolio B to buy the dip?
  • Are you really comfortable in doing the above, not knowing how long this will go on?

Scenario #3 – Fiat/Cash is basically worthless

  • Would having gold in Portfolio A give you more confidence in making it out alive?
  • Would having Bitcoin in Portfolio B give you more confidence in making it out alive?
  • Would having both Gold and Bitcoin be better in this scenario?
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Yes, or No to Gold? That is the question.

It really depends on what you want, your goals, and your risk appetite. I think the most important thing is to know what you are doing and your expectations. For some people, it is alright not to have gold in their portfolio while others prefer some form of security. There are no right or wrong answers, just what matters for the individual.

To me, the role of gold in my portfolio is not to generate revenue for me but to serve as an insurance, especially in an emergency. I have never expect investing in gold is going to make me rich and I think it is unrealistic to assume that. So far, I have not heard anyone who got rich by from gold investment alone. Instead, those millionaires or billionaires made their riches, then they buy gold as an “investment”. If you think deeper, do you really think that they do it to increase their wealth, or does it not seem like buying insurance instead? Food for though huh.

My opinion on gold is that it is often a better hedge against a crisis than against inflation. History has proven that gold prices tend to rise in times of crisis.

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But is that the only question?

What if, god forbids, war has arrived at our shores or we are at the receiving end of sanctions? In this case, gold is only useful if you have it physically. However, you will have to deal with the issue of carrying it around and safeguarding it. The Ukraine war has shown that cryptocurrencies have a place in our modern world and it is a viable option as a currency/asset. The caveat is that this will work only if cryptocurrencies are decentralized in nature (i.e. Bitcoin). No, your coins and tokens in centralized exchanges don’t count. What matters if you can use them in offline wallets (i.e. Ledger) for day-to-day transactions that can keep your life going.

Many people tend to compare or associate Bitcoin as gold or technology stocks. It is too early to give judgement and very much unfair to limit their potential. Bitcoin and the rest of the cryptocurrencies are still at their infancies and are trying to figure out where they fit in our world. They have the potential to be an unique asset class, something that we are unable to visualize or understand for now.

At the end of the day, gold and cryptocurrencies are just tools for us to use, you have to decide which works to your best advantage.

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