Money Talks Explains: Everything you need to know before investing in gold

Summary

In this episode of Money Talks Explains, Andrea Hang delves into the topic of gold as a safe haven investment with Shiaan from the World Gold Council. They discuss the historical and financial reasons why gold is considered a stable asset during times of market volatility, inflation, and geopolitical uncertainty. Shiaan explains the factors that influence gold prices, including central bank buying, interest rates, and currency fluctuations. For those looking to invest in gold, he covers different methods available in Singapore, such as physical gold, ETFs, and gold jewelry, along with advice on how much gold to include in a diversified portfolio.

Q & A

Why is gold considered a safe haven asset?

Gold is considered a safe haven asset because it traditionally performs well during periods of market instability, geopolitical conflicts, or economic uncertainty. Unlike other assets, gold is scarce, has no inherent credit risk, and is not subject to political risk, making it an attractive option for investors during turbulent times.

How does gold perform during periods of high inflation?

Gold tends to perform well during periods of high inflation because, unlike fiat currencies, it is a scarce asset that cannot be printed. When inflation exceeds expectations and becomes out of control, gold's value usually increases as people seek a stable store of value.

How do geopolitical events affect the price of gold?

Geopolitical events like wars, trade conflicts, and international tensions create uncertainty in global markets, often leading investors to seek safety in gold. Central banks and institutional investors typically buy more gold during such periods, which pushes the price higher.

Who are the primary buyers of gold, and how do they influence its price?

The primary buyers of gold are central banks, institutional investors, and retail investors. Central banks, especially those from countries like China, India, and Eastern European nations, increase their gold reserves during times of uncertainty to protect their currencies. This demand from large buyers canGold as Safe Haven drive up gold prices.

How do interest rate changes influence gold prices?

Gold typically has an inverse relationship with interest rates. When interest rates are high, gold tends to perform poorly, as it does not provide yield compared to interest-bearing assets. Conversely, when interest rates are low, gold prices tend to rise as it becomes more attractive relative to other investments.

What are gold-backed ETFs, and how do they differ from owning physical gold?

Gold-backed ETFs are exchange-traded funds that hold physical gold and issue shares representing the value of that gold. They offer an easy way to invest in gold without having to store or handle the physical metal. However, they come with management fees, while physical gold offers direct ownership without such fees but may require storage costs.

What are the advantages of buying physical gold compared to gold jewelry?

Physical gold, such as bullion, has intrinsic value based purely on its weight and purity. Gold jewelry, on the other hand, is priced higher due to craftsmanship and design. While jewelry can be considered an investment, its value may not track the gold market as closely, and its resale value will depend on factors beyond the gold content, such as design and brand.

Is it a good idea to buy gold as part of a diversified investment portfolio?

Yes, gold can be a valuable part of a diversified portfolio. It tends to have low correlation with equities, which means it can act as a counterbalance during market downturns. Gold provides a level of resilience to the overall portfolio, especially during times of financial crisis or economic instability.

How much gold should an investor allocate in their portfolio?

The optimal gold allocation typically ranges from 5% to 10% of an investor's portfolio, though this depends on the investor's risk tolerance and the overall composition of their holdings. Investors with more risk in their portfolio might choose to allocate more to gold, while those with safer investments like bonds might allocate less.

What should investors consider when deciding between buying physical gold or gold-backed ETFs?

Investors should consider their preference for direct ownership versus convenience. Physical gold provides tangible ownership but requires secure storage and may involve premiums or discounts when buying or selling. Gold-backed ETFs are more convenient and liquid, especially for those familiar with stock market trading, but they charge management fees.