How to invest in gold

How to invest in gold

Gold is not just a commodity.

It is also a currency and an asset class, says Mr Robin Tsui, vice-president and exchange traded fund (ETF) gold specialist at State Street Global Advisors.

Central banks around the world also use gold as a major reserve asset.

"Gold's diversified usage and demand makes it unique compared to other asset classes," says Mr Tsui.

Gold prices are influenced by multiple factors, from central bank policies and interest rates to emerging market demand and mining production.

These global drivers can support gold prices during periods of local currency depreciation, and may help gold act as a hedge against global inflation, says Mr Tsui.

Gold works well in a well-balanced and diversified investment portfolio, adds Mr Tsui.

It holds its value (capital preservation) and has low or negative correlation to most other asset classes such as equities, thus offering diversification for one's portfolio.

That means gold prices do not mirror equities indices such as the Straits Times Index, S&P 500 Index or Hang Seng Index.

"The indices can move in a negative direction while gold moves in a positive one, providing a hedge to losses arising from equities," he says.

Studies have shown gold prices move up during economic downturns.

Gold has also historically protected investors against inflation and deflation as well as currency devaluation, thus helping to preserve capital, says Mr Tsui.

Gold is also a very liquid asset with limited credit risk, and is considered by investors as a "store of value" and "safe haven".

Mr Tsui says findings have shown that to get a well-balanced and diversified portfolio, one should hold about 2 to 10 per cent in gold.

He says: "Gold should be viewed as a long term strategic asset."


Before jumping in, Mr Tsui says investors should assess the different options in terms of benefits and costs, weigh investment goals and examine their risk profile. There are several ways to invest in gold:

l Investing in physical gold bars. Having gold in one's hand may feel more secure but "buying physical gold bars is usually more expensive than buying gold ETFs and investors will have to consider storage and insurance costs", says Mr Tsui.

l Investing in gold ETFs. This method is relatively cost effective but one will not be able to see or hold the physical gold as it is stored in a vault.

l Long gold futures or options. The method does not require full funding up front, which may be preferable to investors looking for leverage, says Mr Tsui.

But one will need to roll the futures contracts regularly to maintain exposure - and thus may not be suitable for non-professional investors, he notes.

Other ways include opening (paper) gold accounts with banks and buying gold mining stocks.

"Gold ETFs are designed to precisely track the spot price of gold, offering investors a relatively cost-efficient and secure way to own gold without having to pay the transportation, storage and insurance costs of holding physical gold," says Mr Tsui.

It is most likely fully backed by physical gold bars and traded on an exchange like a stock.

For investors wishing to take a strategic position in gold, gold ETFs provide a simple, secure and relatively cost efficient mean of participating in the gold market, he adds.

"When investing in gold ETFs, investors should take into account the reputation of the ETF provider, liquidity of the ETF, trading volume, bid/ask spread, the expense ratio charged and if the ETF is fully backed by physical gold," says Mr Tsui.

This article was first published on April 24, 2016.
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