In 2008, we had the Global Financial Crisis. Stocks tanked. Gold rose rapidly.
It has ignited a global rush to get the yellow metal. This includes central banks, billionaires, and millions of individual investors worldwide. After all, gold is regarded as a safe haven against a plausible economic disaster in the near future.
This rush has also caught up in Malaysia. New establishments sprung up to capitalize on the growing appetite of gold among the locals. Evidently, we have more choices of dealers and brokers of precious metals and have also been introduced to a variety of alternatives to benefit from an appreciation in gold prices. Some are legit while some are not.
In this article, I’ll share five investment vehicles that were created to be a substitute of gold. They are designed to allow investors to profit from gold price appreciation without actually owning a piece of it. If you are reading this, perhaps, you’re tempted to get into one of them.
Hold your horses.
Before investing, it is best to have knowledge on what you’re getting into; their unique attributes and their pros and cons. It is off the mark for one to believe that he is investing in gold just because he bought a vehicle that is somewhat associated with gold. Please don’t be misled. Thus, without further ado, here are the five investment vehicles:
#1: Gold Passbooks
Today, we can open a gold passbook account with several local banks. They include CIMB, Maybank and Public Bank. There are two main advantages for depositors. Firstly, it is convenient as we don’t need to think about safekeeping. Secondly, it is cheaper as the buy-sell margin is lower and the price per gram is fixed regardless of deposit amount intended.
So, is it as good as gold? Not so.
Let us say, I have a gold coin. I’m able to sell it to any individual, brokers, dealers and other interested parties who are willing to buy. Also, it is possible for me to receive payment in other currencies than the Ringgit. Instead, if I have a Maybank passbook, it is obvious that I can’t exchange it with a CIMB passbook. Also, I would be limited to receiving Ringgit if I choose to make a withdrawal in the future.
Bitcoin is a digital currency. It is a system of transferring and storing value from one to another worldwide. Some perceived Bitcoins to be ‘Digital Gold’ as they have a handful of similar attributes. They are divisible, have limited supply, malleable, and hard to be counterfeited.
So, is Bitcoin an alternative to gold? Not so.
This is because Bitcoin itself has no intrinsic value. Its value is based on trust. For instance, Bitcoin is more valuable if there are more people accepting it as a functional currency. Gold is different. The yellow metal is tangible and has intrinsic value by itself. This means, unlike Bitcoins, it is impossible for gold prices to drop to zero and lose its value completely.
#3: Gold Trading
Occasionally, we can find advertisements, online and offline, on various tools to profit from gold trading. They include Gold ETFs, Gold Futures, and Gold Options. To some extent, we can use some form of leverage, commonly known as margins, to boost our trading capital to achieve greater gains.
So, is trading better than owning gold? It depends.
Personally, I think gold is mentioned in these advertisements as an attraction. This is because, I believe, gold has very little to do with a person’s success in trading. Trading is a skill which involves interpretation of charts and execution of a proper trading strategy. Regrettably, most failed as they trade without any skill and a strategy.
If you intend to be a good trader, it is best to learn, practise and enhance your trading skills with pseudo-cash first before trading with your own hard-earned money. Most likely, once you’ve mastered the necessary set of trading skills, you’ll find that these skills are transferrable to trading other products such as stocks, currencies and other commodities.
Really, it’s not about gold as the objective of a trader to generate short-term gains from his trading activities.
#4: Gold Mining Stocks
Today, we can open a foreign trading account to buy shares of gold mining companies. It is misleading to believe that having shares of these stocks are tantamount to having gold. This is because it is more difficult to evaluate the investment potential of gold mining stocks than gold itself.
Gold is simple. It’s about understanding the relationship between demand, supply and prices. Besides gold, the value of a gold mining stock is dependent on its productions, asset portfolio, management and financial results. The investment is subjected to additional risks such as labour strikes, hikes in royalties, and changes in political agenda and tax regulations.
There is much to elaborate. But, suffice to say, it is possible for stock price of a gold mining stock to drop to zero as the company declares bankruptcy. It’s not the case for gold which always and will continue to have intrinsic value by itself.
#5: Gold Mutual Funds
Precious Metals Securities, formerly known as AmPrecious Metals, is probably the most widely known mutual fund that invests in gold mining stocks in Malaysia. It is a fund that invests in Deutsche Noor Precious Metals Securities Fund which invests in a portfolio of gold and silver mining stocks around the world.
So, is it better than buying individual gold mining stocks? It depends.
It is more convenient if you don’t have time to do research on gold mining stocks. On the flip side, you’ll be incurring initial sales charges and recurring annual trustees and management fees for investing in a gold mutual fund regardless of its performances in the future.
Am I Saying Gold is Better?
Here’s what I believe:
Firstly, it boils down to knowledge. If you don’t have the knowledge on Bitcoin, Gold Trading, and Gold Mining Stocks, it is best to be educated first before investing in them.
Secondly, it depends on your personal reasons for getting into gold. Personally, I’m one who is looking for a simple way to protect my wealth against the devaluation of Ringgit. As such, owning physical gold bullion, coin or wafer, is more suitable than any of the five investment vehicles mentioned above. Why?
The answer is longevity.
Gold has been around for over 5,000 years. It has lasted multiple civilizations, empires, dynasties, world wars and is still present today. Its track record of sustainability remains unrivaled as compared to the five alternatives mentioned above today. As such, I prefer having physical gold bullion over substitutes that is somewhat related to gold.
Co-Founder of Goldsilvermethod.com
The #1 Online Gold & Silver Education Course in Malaysia