3 things to take note of when investing in gold

Since the selloff scare in February earlier this year, gold prices have (almost miraculously) rallied strongly after being stuck in a multi-year slow grind downwards. With hedge fund long positions in gold being incredibly high, there has been renewed interest in gold investments. Here are some basic things to understand before putting your hard-earned money in gold.

Difference between paper and physical gold

Gold, despite its simplicity as the yellow metal, actually trades differently depending on whether it's paper or physical gold. Paper gold refers to derivative claims on gold, meaning you don't actually see the physical gold you are buying but have a claim on a portion of gold holdings. Physical gold refers to the gold we are familiar with, jewellery etc. However, the most liquid forms come in standardized coins or bars.

A simplistic way to think about this is akin to the difference between holding shares of a commercial REIT vs. your own commercial property. One is simply a paper claim, the other is something physical that you own.


Ways to invest in gold

This basically boils down to your investment horizon, and your personal objectives when holding gold.

Gold ETFs (both the US and Singapore-listed ones) have grown in popularity due to liquidity and ease of access. However, they are simply paper claims and fees can pile up in the long run. Hence, they are more suitable for shorter-term investments.

If your objective is to hold it over your lifetime and possibly pass it down the generations, clearly the better choice is physical gold. That way, no matter what happens to the economy, you have a physical "hard" asset to bank on. The drawback is that the market is more opaque and fragmented, and you need to know which coins/bars are most liquid and enough know-how to ensure you don't get ripped off.

Risks to take not of when investing in gold

As Warren Buffett puts it, there is no point holding an asset that does not generate any yield or has any intrinsic value.

If you subscribe to this theory, gold is simply reduced to being a speculative asset with no true fundamentals to bank on. Gold prices are also highly volatile and may not be within your risk appetite.


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