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Thursday, 21 March 2013

Is Gold considered as investment or insurance?


It is quite interesting to listen to intellectual debates on whether Gold can be considered an investment (when it has no cash flow) or is it an insurance.


Investment

I remember around 2005, I remember reading in the Sunday Times about how a Singaporean investor became a millionaire by investing in Gold. 

He had sunk in his life savings of SG$500,000 into Gold when it was US$250 an ounce a few years back. When his story was published, Gold had doubled to US$500 an ounce. Making him a millionaire!

And he's not selling! He's convinced Gold will double again to $1,000 an ounce in the next few years.

Hey! He was right again!!! If had resisted the urge to sell, he is doing very nicely with Gold around US$1,600 an ounce today. Even with the appreciation of the SGD against USD.

For this investor, he already had the answer to the question. More importantly, he profited from his conviction.

Gold had outperformed STI from 2005 t0 2012 - yes, Gold beat low cost passive indexing even with no cash flows.

Caveat! Those who bought Gold below US$1,000 and those who bought Gold near the recent top at US$1,900 an ounce would have different responses and explanations to Gold prices today.

It goes to show with all investments (equities, property, commodities, etc), getting the semantics right is not as important as getting this question right: 

Are you early or are you late to the game?


Insurance 

Imagine you have SG$200,000 invested in a low cost passive ETF of STI in 2007/08.

You had the harrowing experience of seeing your "investment" got sliced into half at the lows during March 2009.

4 years just blew by just like that! And now you have recovered all your "invested" money. You did not make any money, but then you did not "lose" any money either. Or so you think.

SG$200,000 4 years ago can buy that stylo car you've always wanted. To  buy the same car now, you most probably need to take out an additional loan...

The same SG$200,000 4 years ago is around 20% deposit for the million dollar condo you are eyeing. Now you are kicking your idiot decision to invest in the stupid ETF instead of that condo. The condo is now valued at....

But if you had "invested" the same SG$200,000 in the STI ETF anytime during 2009, equities turned out not so bad as an "insurance" against lost of purchasing power 4 years later- just like Gold.

As some have discovered after buying insurance, you can overpay for the same benefits and protection! 

A variation of the above italics on investment:

Timing is everything! 



     
Traders' view on Gold

I prefer to use a Trader's view on Gold as it's more actionable, provides greater clarity, and less prone to distractions.

When you buy Gold, you are shorting USD.

When you sell Gold, you are long USD.

It's just this simple!


OK, maybe not so simple.  Remember that your profits for Gold is in USD. It will be reduced/or enhanced by the currency exchange movements between USD/SGD.  

If you are bullish on Gold, a better trade/investment could be to long Gold in JPY terms:

You buy a Gold ETF and you buy an equal amount in a currency ETF that shorts JPY.
 
Welcome to the world of pairs trading!
     
  
     


10 comments:

  1. Hi SMOL

    I agree with your philosophy. Timing is about everything.

    With stocks, if you have invested at the bottom, your return would give you probably abour 4-fold from the 2008 bottom.

    With properties, if you have invested at the bottom, your return would have given you returns much more because there are almost with certainty leveraging is involved in property.

    B

    ReplyDelete
    Replies
    1. B,

      Every asset class will have it's day under the sun. No point in debating whether equities is better than property or whether bonds are better than dividend stocks.

      It's more about timing and hoping onto the train earlier than the vast majority.

      Timing is important for relationships too. Meeting the right girl at the wrong time... Yes it's sad to belong to someone when the right one comes along...

      Ah... Time for a love song now ;)

      Delete
    2. Ahh now we see SMOL is in love :)

      Delete
    3. Really? Another one in Love ah!

      I was happy for one 40+ guy who is in Love!

      Delete
  2. Gold as an investment but needs an Exit plan


    It is more than just timing.

    This is Right and Hold. Exit and still Right again. Powerful!




    ReplyDelete
  3. I'm always in love ;)

    With Myself

    With Music

    With Cherry Blossoms

    With Shanghai

    With Taipei

    With Hong Kong

    With that girl I can never have for she now belongs to someone else



    ReplyDelete
  4. Dear SMOL

    You are in love with life itself!

    Carpe diem - seize the day.

    One of the greatest tragedies of life is to live someone else's.

    You are taking your own path and that is indeed rare in Singapore. :-)

    Be well and prosper.

    ReplyDelete
  5. When you talk about investing in gold, it can be quite vague because there is a market for paper gold and then there is a market for physical gold. Although they are both benchmarked to spot gold price, in reality, there are premiums for both.

    Personally I prefer physical gold to paper golds (eg. ETFs, futures). The former can be a useful hedge for inflation and use to achieve a balance investment portfolio.

    ReplyDelete
    Replies
    1. LOL!

      Some people prefer to pay in cash. Some prefer to use credit cards. Some write cheques. Some use Paypal or some other forms of electronic transfers.

      By the way, is the electronic money in your bank account different from the physical cash in your wallet?

      True believers who own physical gold do not do it out of preference. They want an asset that's outside the financial system in case of a financial meltdown.

      Cash in the bank carries a counter-party risk like some Cyprus depositors found out...

      Water is water - even if they appear as snow, cloud, rain, mist.

      Delete

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