Investing in Gold

Gold is a popular investment option. You might think it’s a sure way to make money because you’ve probably heard many people say that the price of gold will never fall. But investing in gold isn’t easy, and is about more than just buying gold bars or jewellery. There are actually many ways to invest in gold.

Let’s look at what you need to know before investing in gold.

Summary

1. Like other types of investments, the price of gold goes up and down.

2. When investing in gold, you need to think about:

• What type of gold investment you want to make
• The difference between the spot price (global market price) of gold and the price you buy or sell your gold
• Liquidity
• Insurance

3. There are many ways to invest in gold, so you should choose a method that suits you.

DEEP, DEEP DIVE

What do you need to understand before investing in gold?

 How is gold valued?

Gold is valued based on supply and demand. The more the demand, the higher the price and vice versa.

Is gold a good investment?

To answer this question, let’s break it down into two parts.

1. Short term investment

   

   (Source: World Gold Council)

   If you look at the price historically, from the 1980s to early 2000s, the price of gold mostly stayed the same. That’s about 40 years with not much change in its price! It then began rising from 2004, taking another eight years to reach a high in 2012 before falling again. The price of gold has now reached another high now in 2020, marking another eight years since its previous record price.

   In the short term, the price of gold goes up and down a lot making it an unstable investment. But if you are willing to take on more risk, you may be able to make money. However, with the higher risk, there’s a chance you could lose some of your money.

2. Long term investment
   Although past performance should never be used to predict future trends, the price of gold over the long term has shown that the gold price has gone up a lot over the last 50 years (that’s a long time). One disadvantage of holding on to a gold investment for the long term is that it doesn’t give you dividend income. The only way for you to make money from gold is by selling it. Other investments like certain stocks on the other hand, pay dividends, so you will be able to enjoy the dividend income while still holding on to your investment.
    

Why do people invest in gold?

Historically, people invest in gold in the following situations:

1. Low interest rates

   Usually when the interest rates are low and your returns from Fixed Deposits are low, people tend to invest in gold as they think it would give better returns.

2. Economic uncertainty

   When the economy is uncertain and people start to fear, or when the currency might get affected, people tend to invest in gold.

3. Market corrections
   Market corrections is when the stock market starts to fall after reaching its peak. During this period, when people start getting fearful of losing in the stock market, one area that people may look into is investing in gold.

Are gold investments Shariah compliant?

Gold investments are Shariah compliant if it fulfils two main criteria:

1. The investment is backed by physical gold.
2. The buying and selling of physical gold is done within the timeframe defined by the World Gold Council and the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).

How to invest in gold

Physical Gold

You could buy gold in the form of jewellery, gold bars or gold coins. Different forms of gold can have different prices per gram depending on manufacturing and labour costs. For example, when you buy jewellery, you may pay for the design and value of the gold, but when you try to resell it, you most likely will only get 70% of the market value. When you buy physical gold, you are responsible for keeping it safe. So, you may have to rent a vault or insure the gold yourself. Physical gold is less liquid as you will have to find a buyer yourself. The spread can fluctuate depending on who you buy gold from.

What do you need to look out for?

In some cases, when you buy gold bars or coins from a store, the gold could be mixed with other metals. So make sure you get a certificate of authenticity and only buy from an authorised seller.

Gold-backed Exchange Traded Fund (ETF)

An ETF is a basket of securities (like stocks) you buy and sell through the stock exchange. A gold backed ETF trades like regular ETFs but is only backed by one asset, gold. To learn more about ETFs, read our guide.

Currently, the only gold backed ETF on Bursa Malaysia is the TradePlus Shariah Gold Tracker which follows the performance of gold. Most ETFs use unallocated gold so you don’t have ownership of the gold. Since ETFs are traded on an exchange, they are highly liquid investments and usually have a very small spread. Some ETFs do pay you a dividend, on top of earning from the increase in the price of gold.

What do you need to look out for?

TradePlus Shariah Gold Tracker essentially just tracks the price of gold. So you will not have any right to any gold.

Gold Investment Accounts (GIA)

You could invest in gold through gold investment accounts from banks. Through these accounts, you can make a profit from your investment by buying and selling gold online, making it a highly liquid investment. With most banks, the minimum amount to buy is 1g. GIAs use unallocated gold so the bank has ownership of the gold. So, you won’t be able to withdraw gold from the banks. But, you can get your investment back in cash or you can credit it to your other accounts. GIAs usually charge a large spread .

What do you need to look out for?

The gold in GIAs are not protected by the Perbadanan Insurans Deposit Malaysia (PIDM). So if the banks have to shut down, your investment will be lost.

Internet Investment Gold

There are a few companies like HelloGold, that allow you to buy physical gold online and will store the gold for you in a vault (allocated) until you wish to sell it. There are two options for you to sell your gold. One is to sell it back to the company, or you could withdraw your gold from the company. Most internet investment gold companies have low minimum investment requirements and usually charge a low spread but have other costs like transaction and administrative fees. Internet investment gold is usually highly liquid, unless you withdraw the gold from the company.

What do you need to look out for?

Some companies will not buy back the physical gold from you once you withdraw it and you will have to sell it elsewhere.

Gold-Related Stocks

You could buy shares of gold mining or jewellery companies. Gold mining companies’ stock price may relate to the gold price, However, it is important to remember that there are other factors that can drive the stock price. If the company is profitable and gives dividends, you could be earning more than if you just invested in gold.

What do you need to look out for?

Remember, there are other factors that determine the price of the stock. So even if the price of gold is rising but the company is not performing well, the price of the stock may not increase and you won’t receive dividends. Like investing in any other stock, make sure to do your homework on understanding the company before investing. Read our guide to understand what stocks are and how you should value them.

 

What to look out for when investing in gold

1. Ways to invest
   Five common ways to invest in gold are:
   • Physical gold
   • Gold-backed Exchange Traded Funds (ETFs)
   • Gold Investment Accounts
   • Internet Investment Gold
   • Gold-related stocks
      
2. Who owns the gold?
   There are two types of gold ownership – allocated and unallocated. Allocated gold is when you are the owner. Unallocated gold is when the company you’ve invested in owns the gold. An example of allocated gold is when you buy physical gold. An example of unallocated gold is when you open a Gold Investment Account with a bank. Here the bank owns the gold and not you, which is why it is unallocated.
   
   Allocated gold gives you the comfort of knowing the gold belongs to you. However, this usually comes with more fees like storage fees and insurance fees to keep the gold safe. Or if you keep it at home, you’ll probably have to buy a safe to store the gold. For example, when you buy physical gold, you are the owner of the gold hence it is allocated.
   
   With unallocated gold, you pay less in fees, as you don’t have to pay for storage or insurance, which makes it a cheaper way to invest in gold.For example, But it can be more risky because if the company shuts down, you might lose your investment.
   
   So if you prefer to have the security of knowing your investment is safe, consider using an allocated gold investing method. If you just want to pay less in fees and don’t mind the higher risk, you could consider an unallocated gold investing method.
    
3. Spread
   A spread is the difference between the spot price (global market price) of gold and the price you buy or sell your gold. All methods of investing in gold charge you a spread but some may charge a larger spread than the others. A larger spread would mean you have to pay more to buy gold. A smaller spread would mean you’ll be paying closer to the spot price when buying gold.
   
   For example, if the global market price of gold is RM252 per gram, you might have to pay RM254 per gram for it, which is RM2 more than the market price. Or when you sell your gold, you might have to sell at a lower price of RM250 per gram, which is RM2 lower than the market price. So find an investment with the smallest difference to help you save on cost.
    

4. Liquidity

   Liquidity means how quickly you can sell off an investment for cash. Depending on how you invest in gold, it can be easier or more difficult to sell. For example, selling physical gold is more difficult than selling a gold-backed ETF, mainly because with physical gold, you need to find a buyer, and carry your gold with you to make the sale. With ETFs, you can sell your gold investment over an exchange like Bursa Malaysia, just like buying and selling stocks. So, if you’ll need to quickly turn your investment to cash, be sure to pick a more liquid investment.
    

5. Insurance
   As gold is a valuable item, it’s important to insure it for things like theft. Not all gold investments are insured. So depending on how you invest, the company may have insured the gold for you or you may have to insure the gold yourself. So it’s important to check!
    

¹Gold Prices, World Gold Council