COME October, investment-grade gold will effectively be 7 per cent cheaper as Singapore has decided that it will scrap the goods and services tax (GST) on the import and supply of precious metals to encourage more gold trading here.
What this means is that investors — whether retail traders, gold exchange-traded funds (ETFs), or private banking clients — will soon be able to trade and store their gold in Singapore free of GST.
At the moment, most investments of this sort are done offshore or kept within the free trade zone at the Singapore Freeport.
Before a young investor enthused by this prospect runs out to buy himself bullion gold bars or coins though, here are some issues to consider.
Is gold still a ‘safe-haven’ asset?
Gold has traditionally been seen as a ‘safe-haven’ in times of economic uncertainty and as a hedge against inflation. Many still view it as such.
‘Given the on-going eurozone debt crisis and concerns regarding a slowdown in global economic growth, gold continues to be a safe haven for investors to park their funds,’ says Kelvin Ngo, head of investments at independent financial advisory firm Providend.
In the past two weeks, ‘gold prices have come down due to the US showing better economic and jobs data’, observes Lynette Tan, investment analyst at Phillip Futures.
‘Similarly, with the Greek debt deal temporarily resolved, investor appetite could return and gold could be sidelined for now,’ she adds.
With the focus now on economic growth in China, Europe and the US, if investors begin to feel uncertain about sustained growth again, ‘safe haven demands’ for gold may return.
But there are those who do not see gold as a safe haven asset. ‘Gold is not like bonds, where there is a regular cash flow from interest,’ says Wong Sui Jau, general manager of Fundsupermart.com, the online unit trust distribution arm for iFAST Financial.
‘Historically, gold and gold equities have shown fairly high volatility as well. Thus we don’t believe it exhibits the qualities of a safe haven asset,’ he says. In his view, gold can be an investment to consider for diversification purposes, but should not be seen as low risk. ‘Based on three-year annualised volatility, gold has almost as high a volatility as equities,’ he says.
How much longer will the gold bull run last?
Gold prices have surged in recent years, which gives investors reason to ‘be cautious in their investment stance, especially if one is looking to make a quick profit’, says Mr Ngo.
But he thinks the bull run could continue as long as global risk aversion remains high, real interest rates stay negative and the outlook for the USD, euro and yen remain negative. He sees three main catalysts today — the eurozone debt crisis is not expected to be solved in the near future, the Federal Reserve has indicated that interest rates could remain low till 2014, and the printing of money is expected to weaken the US, euro and yen. ‘Hence, the gold bull run could easily continue till the end of 2012,’ says Mr Ngo.
Agreeing, Ms Tan says if more talk of economic stimulus or monetary easing arises from the Fed or the European Central Bank this year, implying that the economies require more liquidity to aid growth, this will support gold prices. ‘Due to gold’s special status as a store of value, we are likely to see sustained investment demands, particularly when economic growth remains uncertain,’ she says. Phillip Futures is thus ‘still bullish on gold in the long term, with prices likely to test a new high above the US$1,920 an ounce level reached in the second half of 2011,’ Ms Tan adds.
On the other hand, Fundsupermart’s Mr Wong is ‘cautious, if not outright negative on gold’. ‘We believe the bull run, which is now 11 years, has gone on for too long,’ he says, explaining that demand for gold, outside of holding it as an investment, has not shown growth.
One reason why he is negative is the difficulty in justifying the price of gold. ‘There are no earnings which gold can be tied to like traditional companies where valuation mea-sures will make more sense,’ says Mr Wong. His view is that gold prices have risen so much over the last few years simply because people are more willing to pay more for it. However, the ‘safe haven’ status driving this willingness is ‘suspect’, he says, especially as confidence in the US dollar rebounds with recovery in the US economy.
Albert Cheng, managing director, Far East, at the World Gold Council, a gold producers’ association, would disagree. Investors need to note that gold is also a commodity, so the way market fundamentals and the dynamics of demand and supply change matters.
On the demand side, about half of gold demand stems from demand for gold jewellery, over 30 per cent from investment demand and about 8 to 10 per cent goes to industrial uses such as in gold wire for electronic goods, while a small portion is purchased by central banks, Mr Cheng says.
On the supply side, about 2,500 tonnes come out of the world’s gold mines each year. Another 1,000 to 2,000 tonnes of recycled gold is also supplied to the market, making a total of about 4,000 tonnes of gold annually.
While supply remains relatively constant, demand is likely to keep rising, driven by China’s and India’s rising middle class and their demand for jewellery, as well as the rise in investment demand for gold as a liquid asset to act as ‘an insurance policy to portfolios’.
Mr Ngo agrees that the gold market will remain bullish in the short term, but adds that investors ought to keep in mind that gold is a non-yielding asset with little industrial use, so its longer-term performance may be lower than that seen over the past decade.
How should a young investor invest in gold?
Apart from understanding the gold market and the dynamics driving gold prices, a young investor may wish to consider how to incorporate gold into his or her portfolio.
‘Young people would like to take a little more risk, so in terms of gold investments, their allocation would be much smaller, compared to people in their 40s or 50s,’ says Mr Cheng.
With time on their side to ride out economic cycles, young investors ‘should allocate more to equities given that historically, equities outperform most asset classes over the long-term’, says Mr Ngo.
‘However, a small allocation in gold could be useful to provide diversification benefits, especially in times of crisis, or may be used as a hedge against inflation, deflation or currency devaluation,’ he says.
While physical gold remains the ‘safest way’ of getting exposure to gold, as it removes counterparty risks, there are issues of space, security and storage costs to look into. ‘As such, gold indices and ETFs, which are backed by physical gold, would be the next best option available for investors,’ Mr Ngo says.
Mr Wong prefers gold equities, which can be invested in through resource unit trusts or commodity funds, as they are more diversified across companies, and ‘even if the gold price stagnates — a high possibility in our opinion — a gold mining or gold related company can still have avenues to raise profits by controlling costs’.
Other options may be to trade gold ‘in the form of Spot Loco London contracts in the over-the-counter market and in the form of futures, ie, exchange-traded contracts in COMEX, CBOT, TOCOM,’ says Grace Chan, director of marketing and sales channel, Phillips Futures.
But this would only be suitable for ‘savvy investors’, as futures trading involves leverage which means the investor could sustain losses in excess of his initial funds and then may need to deposit additional funds at short notice, Ms Chan says. Only those 21 years and above can open a futures trading account, and need to be assessed to understand the products in order to trade futures.
By Teh Shi Ning