Buying gold 101

Gold prices have been on the rise since the start of the year, and some analysts see it as a great time to buy. The Motley Fool forecast in January that “2017 is set to be gold’s best year in a generation”. 

Before buying gold, however, it is important to look at whether it is actually a good investment. 

Understanding the fundamentals

Prior to considering an investment in gold, brokerage firm Schwab advises, it is helpful to understand the role that gold can play in your portfolio. 

There are four main reasons to consider an investment in gold, Schwab notes: As a store of value in the face of uncertainty; as a hedge against inflation; to diversify an investment portfolio; or to attempt to profit from price fluctuations. 

Investing in gold is complex, however, as everything from supply and demand to inflation and geopolitics can affect the price.

Renowned investor Warren Buffet put it more bluntly. “Gold is a way of going long on fear,” he said. “You really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn’t produce anything,” he explained.

It is also important to understand that the price of gold can be quite volatile. Gold “can take you on a wild ride”, research firm Wyatt observed, “so as an investor you need to strap in and hang on”.

Opportunities for investors in short term 

If you are a speculator or a trader looking to make money from daily price changes, gold offers opportunities. For the majority of investors who want an asset that will increase in value over the longer term, however, the outlook for gold is mixed.

Whether gold is a good investment or not depends on when you bought and if you sold, Wall Street Journal reporter Tatyana Shumsky found after researching a decade of gold prices. 

Looking at the 10 years from 2004 through to 2014, for instance, she said investors who purchased the Standard & Poor’s depositary receipt (SPDR) Gold Trust exchange traded fund (ETF) in the United States at any point before October 2007 would have outperformed the total return on the S&P 500 if they bought and held on. Investors who bought after this tipping point and held the ETF, on the other hand, would have been better off buying stocks.

Gold exchange firm Bullion Vault similarly found tremendous variations. Although gold was the top performer of any asset class six times in the 40 years through 2015, it was also the worst performer 10 times  — “worse than any other major asset class”.

Forecasting gold prices can also be difficult. ABN Amro’s commodity strategist Georgette Boele told Channel NewsAsia late last year that although she had initially predicted an end-2016 target of US$900 (S$1,257) per ounce, gold prices breached US$1,300 in June due to uncertainty over Brexit and then dropped to about US$1,150 by year-end. 

Her target for this year is US$1,100. Mr Jonathan Chan, an investment analyst at Phillip Futures, on the other hand, forecast a price rise to US$1,300. 

Appetite for risk

Given that economic uncertainties abound, it might seem like a good time to invest in gold. As The Motley Fool observed, “the risks facing the world economy are significant and inflation looks set to rise, both of which create the conditions for gold to have its best year in a generation”.

It is also important, however, to take Ms Shumsky’s research and recent experience into account. Investors who bought gold around the time prices hit a record of US$1,888.70 an ounce in 2011 are also still licking their wounds because it has been lower ever since. Gold prices could drop further.    

The decision may then come down more to how afraid you are about the future than whether returns on gold are likely to be positive. And whatever you decide, it is important to realise that gold prices are very volatile and may not be within your risk appetite.

How to purchase gold

If you do decide to purchase gold, there are a variety of alternatives.

 An easy way is to buy through an ETF such as SPDR Gold Shares, which gives the advantage of physical gold without the inconvenience of having to store it. Another alternative is to buy shares in gold mining companies, since a company that successfully mines and sells gold may see its share price rise. 

You can also buy gold bars or coins and store them at home. Banks such as UOB make holding gold easier, as investors can buy gold bars or coins or certificates without physical delivery and then sell them back to the bank. 

Many people also like to buy gold jewellery, although there is a premium for the design that can make the price higher than the actual value of the gold.

Next steps

If you do buy gold, it may be better to view it as a hedge against uncertainty or inflation rather than as an investment. It is important to remember, too, that gold prices can rise or fall quickly. Many experts thus suggest putting no more than 10 per cent of your investments into gold. Whatever you decide, it is certainly easy to buy gold in many different forms.