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Saturday, 19 September 2009

Investing in gold, a worthwhile option?

As gold price rose past USD 1,000, there seems to be a renewed interest in investing in gold. I am pretty curious to find out whether this is a worthwhile adventure.

USD quoted commodities

As with many commodities such as crude oil, gold is quoted in USD. When USD depreciates against major world currencies, gold prices tend to rise in assumption that value of gold remains unchanged (neglecting inflation to keep the discussion simple). If this assumption is true, then investing in gold for anybody leaving outside United States becomes more of a forex investment than a commodity investment.

Is gold expensive now?

The following charts shows the gold prices in USD and USD/SGD exchange rate over the same period.
  1. gold prices:
  2. currency:
Indeed, for Singaporeans, the gold price looks like a mirror image of USD/SGD exchange rate chart. Thus, is gold expensive or cheap now?

In January 2005, gold cost about USD $430 an ounce and 1.63 SGD fetch 1 USD then, thus it was about SGD $700 an ounce. Today, 18 September, gold cost about USD 1,014 an ounce and now 1.4149 SGD fetch 1 USD, thus gold cost $1,434.70 now (about twice as expensive). That is a growth of slightly over 100% versus inflation of about 10% in the corresponding period. Thus I do think gold IS expensive now.

A different conclusion might be derived using data stretching beyond 2005 but I could not find these historical figures. Nontheless, looking at historical gold prices:

gold was never more expensive.

Investment opportunity?

As with ANY rationale investment, I aim to buy low and sell high and profit from the difference. While buying high and selling higher can be potentially profitable, the risk could be disportionately higher and not a route I am keen to take.

However, assuming quoting gold in USD is a thing to stay (similar problem afflicts crude prices), as USD budget deflicit widened and current account deficit worsen as US try to spend their way out of recession (essentially printing USD), USD against major currencies (incl. SGD) could continue to slide, thus providing a strong lift for gold prices.

How far US deficit will grow, how far USD will continue to slide and how much lift could be provided for gold is anybody's guess and I'm NOT comfortable with betting on it.

Alternative investment?

On the assumption that US cannot allow fiscal deficit to grow indefintely and hence USD will not depreciate beyond gross cost of paper it's printed on, USD (against SGD) could be a better bet. i.e. an even riskier bet of buying 'cheaper' USD now, wait for the US recession and budget deficit storm to blow over (how long?) and buy gold when USD regains its strength. By then, gold price will have come down and USD will have traded much higher against SGD. Gold becomes cheap once more.

Physical Gold, anybody?

It is quite apparent I'm not keen on gold as an investment. But I did toy with the idea of buying some physical gold for fun, i.e. just to feel shiok. No, I'm not talking about gold jewellery, but real, solid gold.

Phyiscal gold can be purchased from UOB at a premium above traded price and prevailing GST. While a kilo-bar is too expensive to buy and crazy to leave it at home, a bullion coin is nice to keep as a souvenir. Maybe I'll get one when the gold becomes cheap, again.

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Anonymous tim said...

hi i've not been reading your blog for a while so came in for a look-see.

with regards to buying gold from uob, if u are buying the gold bars (in many denominations eg 100g, 50 g etc), u must keep the certificates. if your certs go missing, uob will not take them back when u want to sell. but not to worry cos many small time gold dealers will gladly take your gold bars in at buy-in rates almost on par with uob.

i also believe that gold is expensive now even though jim rogers said it will go up to $2000! i have sold most of mine but have left the gold coins untouched. they have great sentimental value..

pls continue to blog. even though our portfolio is quite different, it's always nice and educational to see what others are doing... take care

9 October 2009 at 14:22  
Blogger Market Uncle said...

thanks for dropping by!

didn't know i need to keep the certificates if I buy solid gold from UOB, nice info!

and yes, gold is really expensive now.

10 October 2009 at 09:19  
Blogger Mike said...

I think gold will continue to be one of the better asset classes to invest in going forward due to the higher risk-reward setup that it offers due to the government's efforts to reflate asset prices. I recently read several good articles at that discuss the Federal Reserve's easy monetary policies to avert deflation. I especially liked the article titled "Gold Price Up, Dollar Down – Does it Really Matter?", which discusses the potential investment implications for fiat currencies, the gold price, and gold mining companies due to all the money printing by world central banks. There are many serious unintended consequences of such huge amounts of government spending, and I think this has the potential to cause even further damage to fiat currencies.

13 October 2009 at 23:43  
Blogger Market Uncle said...

Hi Mike,
What is the potential upside for gold you are looking at? USD $2,000, 4,000? per ounce? To make gold an investment grade vehicle (i.e. provide adequate returns compared to other investment vehicles), most of the major currencies need to depreciate much further. Reducing interest rate to near zero (but Australia already start to increase rates) and printing so huge amounts of money (together) only devalue their currencies so much, they'll need to print much more to make gold investment more attractive.

19 October 2009 at 14:08  
Blogger Mike said...

Market Uncle,

I could see gold getting in the 3-4k range for sure. On an inflation-adjusted basis gold's all-time high from the early 1980s is about $2,300. And based on the Fed's statement yesterday, they are not going to be turning off the money printing machines anytime soon. I think we are in a serious liquidity trap, and the Fed knows that they may not be able to ever turn off the spigots, given the severity of the problems and huge debt levels in our economy. And if they were to develop a more hawkish policy, it would destroy our economy that has become so addicted to debt, such that a deflationary spiral would occur, and people would need to turn to a solid form of money rather than one that can be created out of thin air. So that is why I remain bullish on gold.

6 November 2009 at 01:30  
Blogger Market Uncle said...

Hi Mike,
From USD's perspective, yes, it will depreciate against major currency and as such, gold will escalate the other way, hence its almost a sure bet for you.

From SGD's perspective, which is a weighted basket of major trading partner's currency, it will appreciate against USD for sure. But against gold, things won't be so simple.

In short, gold IS investment grade for you, but not for me.

6 November 2009 at 22:15  
Anonymous Anonymous said...

13 December 2009 at 00:02  
Anonymous Anonymous said...

Great article as for me. I'd like to read more concerning this topic. Thanks for sharing that information.
Joan Stepsen
Gifts geek

15 January 2010 at 18:22  

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