The most precious form of gold is the bars and they come in different weight and size. Gold is measured in troy-ounces even though it is stated conveniently as ounce (oz). It is important to know that one troy-ounce is not equivalent to one ounce. The most standard weight for a gold bar is 400 troy-ounces and would cost around US$400,000 one bar if the gold price is US$1,000/ounce. You must be rich enough to buy a few of these bars. If you are not that rich, you can consider other weights like kilobar (1,000g or 32.15oz at US$32,150), 5 Tael bar (187g or 6oz at US$6,000) and ten tolla bar (117g or 3.75oz at US$3,750). Note: Prices quoted are based on US$1,000/ounce for ease of calculation. UOB Bank offers the service to buy and sell gold bars. The drawback for smaller gold bars is that your cost of ownership will be higher, as the fixed cost of brokerage/admin fees as well as storage fees will take up a higher percentage of your purchase price.
- Most valuable form
- Storage cost
- Insurance cost
Gold Bullion Coins
UOB Bank sells 3 types of gold bullion coins namely, Canadian Maple Leaf Gold Coins, Australian Kangaroo Gold Nuggets and Singapore Lion Gold Bullion Coins. They range from 1/20oz to 1oz so if gold cost US$1,000/ounce, the coins would cost from US$50 to US$1,000. They are much more affordable than gold bars but similar to smaller gold bars, the cost of ownership is higher. Remember the theory of economies of scale works here too – the more you buy, the cheaper, and the contrary is the less you buy, the more expensive is the cost. Some may even charged a premium for “collector’s series” coins in additional to the true value of gold in the coins. In addition, the market for bullion coins are not as liquid as gold bars, which means it is relatively more difficult to sell and often fetch a lower price.
- Next best alternative to bars
- Higher cost to own
- Less liquid than bars
Certificates allow gold to be securitized. Instead of trading the real phiysical gold, ”paper gold” is transacted. This has an advantage when you want to buy and sell gold without the hassle of delivering the physical ones which incur transportation, storage and insurance cost. These certificates are like our paper money, just that they are backed by gold. You can actually use these certificates to exchange for physical gold if you want to. UOB Bank offers certificates that can own up to 30 kilobars of gold per certificate. It is important to buy certificates from established businesses as certificates can be easily forged. Another risk is that unethical companies may also issue certificates without the backing them with the same amount of gold. It will be a problem if many people start to cash in their certificates, you may found that there aren’t enough gold to go around.
- No storage/transportation cost
- Risk of forgeries
- May not be backed by actual amount of gold
Gold Savings Account
UOB offers a Gold Savings Account: “You can buy and sell unallocated gold – through a passbook – at prevailing market prices and transact any time during banking hours in units of one gm of gold, subject to a minimum of five gm per transaction. Limited to a maximum of 1,000 gm per account on Saturdays”. The keyword in that sentence is “unallocated gold”, just in case you miss it. Unallocated gold is like the excess supply in the market that is sold to the investors. This helps the suppliers to clear their stock as well as the banks to profit from it. It is interesting to find out from an article from bullionvault that banks actually “owes” you the gold. It is the same as a cash savings account. You deposit a sum of money in the bank and the bank uses a large percentage of this deposit to do whatever she wants. She pays you paltry interest in exchange for using your money to earn money. It is the same as a gold deposit account. The banks buy the gold for you but will use it for her own purposes to profit from it. Similar to certificates, you may find that one day you are not able to get your money or gold out of it.
- Convenient to own gold
- Risk of not getting back the worth of gold
There is an Exchange Traded Fund for Gold which tracks the gold – SPDR Gold Shares. It is both available in NYSE (US) and SGX (Singapore). From the prospectus – “The investment objective of the Trust is for the Shares to reflect the performance of gold bullion, less the Trust’s expenses.” By buying gold collectively, they claimed that the expenses of carrying, storing, insuring the gold is lowered and can be passed on to the investors. You can now go through your usual broker to purchase gold shares throughout a trading day. Real gold bullion bars are purchased by the trust on behalf of the gold shares investors and are kept “in the form of allocated 400 oz. London Good Delivery Bars in the London vaults of HSBC Bank USA.” There were some claims that Gold ETFs may not possess the actual amount of gold to back the funds it holds. If it is true, in times of crisis, a shortage of gold may cause the fund to collapse and you not getting your money back.
Listed – SGX
Expense ratio – 0.40%
Minimum Order Size – 10 shares
- buy and sell as easy and convenient from the stock market
- May not be backed by the actual amount of gold
A method to buy gold that requires more sophisticated investment knowledge is futures. Futures is a form of derivatives and as all derivatives, they are complicated and if you do not understand or have not traded futures before, it is adviseable to stay away. Those who engaged in gold futures are more speculative in nature as all futures have expiry dates, and usually traders have no intention to exercise the contracts and receive the delivery of the physical gold. They just want to profit from the change in price over the period of the contract. To buy gold futures, you would need to open a futures account with the local brokers. Futures accounts would require a higher capital outlay than a stock account as each contract size is as big as tens to hundreds of thousand dollars. They are highly leveraged which means your losses and profits are amplified.
- Big transaction window (stay open longer than stock exchange)
- Requires more product knowledge
Gold Mining Companies
Besides owning gold directly, you can consider buying shares of gold mining companies. You can look at companies like Barrick Gold (NYSE), Gold Corp (NYSE), and Newmont (NYSE). The risk is that the stock price may not go in tandem as gold price.
- Easy to buy and sell in the stock market
- May not have a direct correlation with the rise in gold price
I guess most of us own a piece or two of gold jeweleries. But jeweleries are not considered good investment because the price that you paid includes design and fabrication cost, which are in addition to the gold material itself. These additional costs do not retain their value over time.
- You have it already!
- Design and fabrication costs included