INVESTING IN GOLD

Introduction

The habit of saving should be inculcated from young. Our parents have always taught us to be frugal, not to be stingy. The saving habits will lead to good financial planning. On earning out first salary we may have several options as to how to spend it apart from having to settle bills, mortgages and rental. If one tries hard and manages to keep about 20% of the salary then we can build up an ‘emergency fund’ which may come in times of need. Financial planners often have this magic figure of five times your salary to be kept in the emergency fund.

Placing money in a savings account does not earn interest of more than 3.0 -3.73 % annually in the current financial climate. This meagre sum is less than inflationary rates. Hence we think of better means of earning ‘passive income’. One such option is to invest in gold.

The Good of Gold

Gold is a popular investment in Malaysia and most buy it as jewellery. Pure gold is sold as bullions and may be purchased at a few banks in Malaysia ( Maybank, CIMB, Public Bank, Kuwait Finance and recently at UOB). Often this is marketed in terms of grams or ounce of gold.

Gold sold as jewellery is another popular means of investment but the purity of gold varies depending on the amount of pure gold in it. Hence one may use to terms like 9 carat and 22 carat (916) gold, the latter having more gold than the former. When gold is bought as jewellery one tend to lose quite a bit when sold back to the jeweller and is probably not the best way of investment unless it is needed for cosmetic purpose.

Gold jewellery is very popular in India, the Middle East and China. Hence, I feel the demand for gold will continue in view of the huge population in both China and India despite what the financial pundits say. Trading in gold is more meaningful if one uses gold investment accounts instead of buying pure gold bars when there is a problem of storing the gold bar in a safe place.

Gold Investment Accounts

The five banks mentioned above facilitate gold investment accounts. Gold prices have skyrocketed over the last few years and are now trading at about RM 5800 an ounce (about 32 gm). That is about 30 % increase over the last one and half years. One gram of gold is being sold at about RM 178 a gram and is being bought back by the banks about RM5-7 higher. The spread of the difference between buying and selling is different in different banks. When one wants to convert the ‘virtual gold’ into gold bars to buy back the rates are very different.

Why buy gold at all? Some consider it a means of diversifying their investment. As gold prize changes over a period of time depending on market forces and factors affected currency and financial instability (as is now the scenario in Europe and USA) one needs to be cautious of how the commodity is trading. The financial pundits say that the price of gold is set to rise further, being a safe haven when equities and share markets fall! Again the prudent investor needs to do his homework when trading in gold accounts. If the price of gold falls you would stand to lose!

Gold Trading

As I said in Malaysia trading in gold is either by purchasing gold bars (near pure) of by opening a gold account passbook. Different banks stipulate the quantum of gold to be purchased. Enquire about the conditions of opening an account, the fees charged should you desire to convert withdrawal into physical gold and the minimum tradable gold.  Remember that Gold Trading accounts do not earn interest like fixed deposits and are not protected by PIDM (Govt. Deposit Insurance Scheme).

Advice

Financial reports give mixed views about the long term price of gold. Many feel the bull market for gold will continue for sometime, but this is anybody’s guess. The strong demand for gold from Indian and China would be plus factors for the time being.

Conclusion

There are many investment strategies and one needs to be aware of the various strategies. The common advice is not to put all your money in one basket. Perhaps gold may the lowest in your priority list when you begin investing as profits are only made when you trade in gold.. No interest is paid for the account you hold in gold and profits are only based on the rising price of gold. Gold bars are near pure gold but if one buys physical gold there is a problem of storage. Gold trading accounts differ in different banks and the term and conditions need to be studied before opening an account.

Sivalingam Nalliah

21 Nov 2011