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Gold for Investment? 3 Things You Need to Know

ASNB Academy

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When I am writing this on 11 March 2024, gold is priced at US$ 2,178 an ounce. 

Based on today’s exchange rate of RM 4.68 per USD, one ounce of gold is worth just above RM 10k. This is a breakthrough considering that it has been hovering in between US$ 1,600-US$ 2,000 an ounce since 2020. 

Perhaps, you are looking to stash aside some yellow metal as gold is: 

  • A hedge against inflation

  • Internationally recognised as an asset class

  • Denominated in USD

  • Less volatile than Bitcoin or many other cryptocurrencies. 

But really, is gold an investment?

Here, I’ll share two major schools of thoughts on gold as an investment. Also, I would like to share three types of gold products that you can choose from if you really do have a “goldbug” in you. Finally, I’ll share my current stance on gold as an investor. In essence, you’ll have the basics to decide if gold is suitable or otherwise. 

How is Gold a Hedge Against Inflation?

Presently, many feel the impact of inflation through rising living costs. However, most aren’t aware of how it all began. To understand this, we need to first learn and have an appreciation of the history of money. For a start, I’ll just touch on two key years that have shaped the value of money that we use today. 

The first of the two years is 1945. 

After the Second World War, the US had the most amount of gold. Therefore, in 1945, the US Dollar became the world’s reserve currency through the signing of the Bretton Woods Agreement. The US Dollar was exchangeable at US$35.00 for 1 ounce of gold and such a rate was fixed. The British Pound was exchangeable at US$2.80 per pound. Also, when the Malaysian Dollar was introduced in the 60s as a replacement to the Malaya and British Borneo Dollar, its exchange rate was fixed at M$8.57 per pound or M$3.06 per USD. 

1 ounce of gold = US$35

1 Sterling Pound = US$2.80 = M$8.57 

1 US Dollar = M$3.06

Then, we have the second of the two years, which is 1971. 

Six years prior, the US began to engage in the Vietnam War. Its military spendings had ballooned and the US funded these expenses by inflating the supply of USD significantly. The French, the Swiss, and the German began to convert their USD back into gold as they feared that the US didn’t have enough gold to back up its currency. Gold kept flowing out of the US until 1971, when Nixon, US President, had suspended the convertibility of USD into gold. 

Since then, the USD and all currencies of the world became fiat instantly. 

In other words, we don’t need gold to create currencies. 

That was the start of inflation. Since then, gold price increased from US$35 per ounce in 1971 to US$2,178 per ounce today. In other words, if you owned around US$ 10k in gold coins in 1971, they are worth US$623k, if you have successfully retained them today. Thus, gold has stood the test of time and is internationally recognised as a hedge against inflation. 

gold as investment

Three Methods to Buy Gold

Today, we could buy gold bars and coins from local jewelry stores or brokers. They include Poh Kong, Tomei and long-standing brokers like Buy Silver Malaysia. The advantage of buying physical gold is to have direct ownership of the gold bars and coins purchased. But, the downside is for us to think about their storage. Do we feel safe keeping our gold at home or in a safe deposit box? 

Such considerations lead us to the second and third options as follows: 

  • Gold passbook accounts. 

  • Gold ETF

Today, many banks (Maybank, Public Bank, ... etc) offer Gold Passbook accounts as a convenient way to attract depositors to buy gold. Obviously, you would not own gold directly but hey, the minimum one could start is to buy 1 gram of gold which is priced around RM 335 today. If you compare this to buying 1 gold coin, this route is definitely a lot more affordable. 

Alternatively, you may buy a Gold ETF like the “TradePlus Shariah Gold Tracker”, which is tradable on Bursa Malaysia. The ETF mentioned is intended to track, as closely as possible, the performance of gold price. This is a route that you could consider if you already have a local stock brokerage account in Malaysia. With a minimum of 100 units to trade, it is also more affordable than buying a physical gold coin or bar. 

Warren Buffett On Gold as an Investment

In Berkshire Hathaway’s Annual Report 2011, Buffett wrote of two portfolios: 

  • A - 170,000 metric tonnes of gold

  • B - 400m croplands + 16 Exxonmobil's + US$ 1 trillion in cash

At that time, both were valued at US$ 9.6 trillion. Which of them will you prefer to have? For Buffett, he prefers Portfolio B as they are all income-productive. As for gold, he doesn’t prefer it as gold is incapable of producing anything. So, gold isn’t really an investment according to Buffett. 

Now, let’s turn back time to 1980 when gold was US$ 600+ an ounce. 

At that time, 1 share Berkshire Hathaway Inc (Class A) can be bought for around US$ 300+ a share. Let’s assume that, in 1980, we can choose between: 

  • 1 ounce of gold

  • 2 shares of Berkshire Hathaway Inc (Class A)

Today, if we had chosen to hold onto 1 ounce of gold, it is worth US$ 2,178. The increase is about 3.6x since 1980. 

But, if we had chosen 2 shares of Berkshire, they are now worth US$ 1.2 million which is 2,000x our initial capital in 1980. 

So back to the question: “Is gold an investment?” 

My stance is “no”. I believe holding onto “productive assets” is far greater. Therefore, I personally invest in stocks and real estate as they produce income. I don’t buy, keep or store gold as gold is unproductive. 

But Aren’t Stocks Risky Investments?

I believe such depends on how we look at it. 

Today, it’s common for people to trade or speculate stocks for short-term gains. Think about it. How many people do you think will read annual reports to study a stock’s business model, finances, management team and growth plans before investing? My bet is most do not.

In other words, most people don’t know what and how much income the stocks are producing (if any) when buying shares. 

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This is likened to a banker who lends without checking the borrowers’ profiles. I would say that is very risky. True investors read annual reports because to them personally, they wish to know the business models, financials, the management team, and growth plans to assess if the fundamentals of a stock is solid, prior to investing in their shares. 

So, the issue lies with the investors, not the stocks. 

But I Don’t Have the Time to Study Stocks. Can I Still Invest?

Well, it’s not recommended to invest without due diligence. If you do not learn, study and assess stocks on a regular basis, the best is to avoid stocks altogether. 

Alternatively, here is what you can consider. 

If you want to invest in a ready-made portfolio, which has a solid track record of delivering income, one of the vehicles you can consider is ASB. If you’re a Bumiputra, you may find this viable if you wish to fund your investment with ASB financing, enjoy no price volatility and flexibility to liquidate your investments. 

You may check my previously written article as follows: 

ASB Academy - Is ASB Still Relevant as an Investment Option