GOLD as a precious metal has always had a certain allure, but even if you collected watches or jewellery, you may not have considered it an investment asset for your portfolio until recently. After all, gold prices stayed in the doldrums for nearly two decades after briefly hitting a high of US$850 an ounce in 1980.
Gold on its own is a volatile asset. If you'd like to sleep well, it would be prudent not to put too much of your life savings into gold. But its value in a portfolio lies in its low-to-negative correlation with other asset classes.
Since the bursting of the technology bubble in 2000, much hand-wringing over the impact of the US burgeoning twin deficits and geopolitical crises in between, there has been a resurgence of interest in gold not just among institutions but among individual investors. Gold is traditionally seen as a store of value, an inflation hedge and a safe haven in times of crisis.
By now the gold bull market is more than six years old. As background, gold prices hit bottom in 1999 at about US$252 an ounce. Last week it traded at US$628, a gain of nearly 150 per cent from the 1999 low. If you were prescient enough to have bought gold early, you would have done well. And if you had sat on the fence you would be wondering if the party could soon be over.
While many analysts believe the fundamental supply/demand balance for precious metals remains weighted in favour of price strength, there are just as many calling for caution. In this context, it is perhaps more prudent to first examine gold's place in a portfolio and its role in reducing risk.
Gold on its own is a volatile asset. Based on price volatility captured on the World Gold Council website, its volatility is the highest among a number of asset classes on an annualised basis over three- to 12-month periods. That makes a cautionary tale for individuals. If you'd like to sleep well, it would be prudent not to put too much of your life savings into gold.
But its value in a portfolio lies in its low-to-negative correlation with other asset classes. This suggests that an allocation in a portfolio could dampen overall volatility and enhance efficiency. What the latter means is that with gold as part of a combination of assets, you should be able to achieve an enhanced level of return for a given level of risk.
With this in mind, the recent launch of streetTRACKS Gold Shares in Singapore is something to cheer about, as it makes gold more accessible to individuals who have a relatively modest sum of capital to invest. Until now, investors who wanted to invest in gold have had to turn to banks for a gold deposit account or buy physical gold.
To date, among the local banks, only UOB provides a gold savings facility. Buying physical gold incurs goods and services tax, which at 5 per cent is costly.
The fund is Asia's first gold-backed exchange traded fund. An exchange traded fund tracks the price of the underlying assets, lagging only slightly due to its 0.4 per cent annual management fee. The fund is backed by roughly 12.9 million ounces of gold, worth a total of about US$8 billion.
To buy the ETF you'll need to have a brokerage account. You'll incur the normal brokerage charges. For now, however, the fund is barred from CPF savings, although a gold savings account - for now only available from UOB - is allowed under its 10 per cent limit.
