The Gold Rush

An article from the Straits Times a few days ago caught my attention, which read:

Singapore’s central bank the world’s third-largest gold buyer from Jan to Sept 2023¹

 

It reported that Singapore had purchased 75 tonnes of the precious yellow metal during the first nine months of the year. While sitting at third, the purchase was slightly dwarfed by the largest buyer, China (181 tonnes) and second-placed Poland (105 tonnes) for the same period. 

 

Gold is recognized globally and used by central banks as reserve assets, which could prop up the country’s currency and economy in times of need. The buying-up of gold by central banks had increased since 2022, with that year well over 1,000 tonnes were purchased, mainly fuelled by the Russo-Ukrainian conflict and soaring inflation then. The recent crisis in the Middle East had made the price of gold jumped to above USD 2,000 before settling down to the current USD 1,980-ish.

 

Photo credit: istara from pixabay.com

The Importance Of Gold

 

Gold is usually seen as a safe haven by many investors, which explained its price spikes in times of uncertainty. Yet it is an asset which, unlike most other asset classes, does not provide growth in terms of yield.

 

For The Bedokian Portfolio, gold comes under the category of commodities asset class, which also includes silver and oil. Commodities (especially gold) forms as a dampener in reducing volatility and stabilizing the overall portfolio, as demonstrated in my post here.

 

I had described the various ways of owning gold in the eBook², but since this post started off from the news of central banks buying gold by the tonne, it would be appropriate for me to share on the various aspects of owning physical gold.

 

Owning Physical Gold

 

Before going in, you must be clear on the objective of owning gold; you are owning based on the market value of the commodity, nothing else. Thus, if the design of the gold bar/coin intrigues you and you are willing to pay (very much) extra for it, then it would be in the alternate investment form of collectibles called numismatics. These should not be in your normal investment portfolio but be held in a separate one instead.

 

That aside, let us go into the key points of owning the metal itself.

 

Find a reputable dealer/bank

 

This would be the first thing in my mind before going around and buy gold. Recent years had seen several bullion dealers setting up shop in selling physical precious metals, which is good as there is a freedom of choice and comparison. As a rule of (my) thumb, a dealer with a physical shop, and with a few years’ presence is preferred. Also, it should carry some gold from LBMA (London Bullion Market Association, more on this later) accredited refineries and mints.

 

If your trust level is for dealers are still low, perhaps you could try out the banks. To my knowledge, United Overseas Bank (UOB) is the only bank that sells physical gold over the counter, but only at UOB Plaza in Raffles Place (disclaimer: I am not sponsored by UOB).

 

Know the form and weight

 

Physical gold comes in two forms: bars and coins, which are both self-explanatory. Within the bar itself, there are two sub-types: cast and minted. Cast bars looked rugged and rough, while minted ones are more refined looking, hence the former would have a lower premium (see later) than the latter.

 

Next up, there are different weight (or mass, for those who are particular on the term) steps; the smallest is one gram, while the largest can go up to one kilogram. Though some of the weights are in metric, there are also weight steps in imperial system called troy ounces (oz), as international gold prices are determined per oz.

 

The premium

 

One of the main disadvantages of getting physical gold is you cannot buy it at its spot price. This is fair as the refinery/mint would need to bear additional costs for smelting, packaging, transport, etc. Since we are investing on the value of gold itself, we would try to look for physicals that has the lowest premium over spot.

 

Other than cast and minted conditions (for bars), the weights do play a part in premiums. Ideally, the heavier the weights, the lower the premium portion of the overall cost. For example, using gold prices and USDSGD exchange rate on 6 Nov 2023, and using a dealer’s online prices, a one-gram bar’s premium is about 33% over spot, as compared to 0.4% for a kilogram.

 

Of course, for retail investors it would be a tall order to get a kilogram of gold (commonly referred to as kilobar), so the sweet spot for premium would be to keep it within 5%. For myself, it would be minimally 1 oz, which is around 3.2%, and I could make a quick check of gold prices since it is based on oz.

 

LBMA

 

The LBMA is a trade association that governs the standards for the global wholesale market for precious metals, and that includes their purity. If a refinery/mint is a member of the LBMA, it would be subject to the rigour of the LBMA and thus the gold bars and coins produced would be of the highest standard that could be traded (and of investment grade quality). Additionally, in Singapore, physical gold that are LBMA approved would be exempted from the Goods and Services Tax, therefore there would be additional cost savings.

 

Storage

 

Physical gold being a tangible asset requires the use of storage. If the quantity is small, you can keep it at home (or other storage options such as a bank safe deposit box), or if the quantity is large, you can engage with the dealer to use their storage facility, though this would bring additional costs.

 

Other administrative stuff

 

Some nitty gritty stuff before I sign off from this post. First, an invoice/receipt is issued whenever you buy a physical. Keep this piece of document as it is needed when you decide to sell it back to the dealer/bank or other dealers. Second, for minted bars, it normally comes in a package denoting the serial number and an assayer’s (an entity that tests the metal’s purity) verification. Do not remove it from the packaging as doing so would make the trade-in difficult as the dealer has the right of not accepting it.

 

I hope the above would provide some helpful tips in starting your physical gold journey. Remember, gold is just one of the assets for your investment portfolio, and diversification is still important on the overall scheme of things.

 

1 – Tan, Angela. Singapore’s central bank the world’s third largest gold buyer from Jan to Sept 2023. The Straits Times. 2 Nov 2023. https://www.straitstimes.com/business/singapore-s-central-bank-is-the-world-s-third-largest-gold-buyer-from-jan-to-sept-2023 (accessed 6 Nov 2023)

 

2 – The Bedokian Portfolio (2^nd Ed), p38-41

REITS Follow-Up

Following up from my post on REITs here on 20 Aug 2023, where I had named three REITs that I would look to add positions to, and I had managed to buy into them since then, namely:

• Frasers Logistics & Commercial Trust (FLCT) (21 Aug 2023, SGD 1.16)
• Paragon REIT (Paragon) (15 Sep 2023, SGD 0.895)
• Frasers Centrepoint Trust (FCT) (20 Oct 2023, SGD 2.06)

 

The prices for FLCT and Paragon had since gone further down, due to the foreseeable sustained level of current interest rates spooking the REIT (and in general property) asset class. It is a heartache but as I had mentioned, it is impossible to catch the bottom and low can go lower. For disclosure, as of 25 Oct 2023, our overall position based on price (no dividends) for FLCT, Paragon and FCT stood at -4.83%, -11.3% and +2.76% respectively.

 

Two main developments had occurred after my 20 Aug 2023 post, and both came from FCT. First is the near-total divestment of their Hektar REIT holdings. The second is the divestment of Changi City Point, in which the latter’s disposal would bring FCT’s aggregate leverage down from 40.2% to 37.1%, improve hedge ratio of fixed interest rates from 63% to 73%, and reduce average cost of borrowings from 3.7% to 3.6%. These are good statistics in the wake of high interest rates.

 

With prices of FLCT, Paragon and FCT (25 Oct 2023) standing at SGD 1.03, SGD 0.80 and SGD 2.11 respectively, I would be more inclined in adding more Paragon, as FCT is hitting our portfolio’s 12% limit and FLCT’s high exposure to overseas properties.

 

Disclosure

 

The Bedokian is vested in FLCT, Paragon and FCT.

 

Disclaimer

Low Unemployment Is Not Good?

Just yesterday, the United States (U.S.) jobs report for the month of September was out.

The numbers, in short:

 

• Non-farm payrolls were up 336,000 against the expected 170,000.
• Unemployment rate was fairly constant at 3.8%
• Labour force participation remained unchanged at 62.8%.

 

The U.S. market’s reaction was quick; within moments of the report’s release, the yields of the U.S. treasuries and bonds rose, the index futures went down and the U.S. dollar had strengthened.

 

To a layman, having a low unemployment rate is good, which is a healthy sign of the economy in general. However, in the current context of high inflation, this is not a good sign.

 

And yes, that not-so-good-sign comes in the form of interest rates.

 

Of Hypotheses And Theorems

 

Economics and markets in general are paradoxical; we can use hypotheses and theorems to explain certain relationships, yet they are not totally valid and reliable in explaining everything.

 

One of the macroeconomic concepts out there is the Philips Curve, which stated that there is an inverse relationship between inflation and unemployment. This meant that when unemployment goes down, inflation goes up, and vice versa. Though sound, the Philips Curve did not manifest much during the 1970s when the U.S. experienced high unemployment and high inflation, becoming what was known as stagflation.

 

Another view is that higher participation in the labour market implies heightened economic activity in the form of increased incomes and demand, which in turn could drive inflation higher; this can be explained from the simple demand-supply curve.

 

Now you know why the markets reacted as described in the previous section when the jobs report came out.

 

In gist, when unemployment is low, it hints that inflation is, ceteris paribus, still high, which in turn the Federal Reserve (the U.S. central bank that governs interest rates) would, barring any other conditions, either raise interest rates or remain them as at the current level. High interest rates are no good for the equities markets and long dated bonds, but good for holding the U.S. dollar.

 

Note For The Bedokian Portfolio Investor

 

Such macroeconomic stuff sits at the top level of the Bedokian Portfolio’s  fundamental analysis model, which is economic conditions¹. While these things are beyond our control, it is good to know and acknowledge them so that you can have a situational awareness of your investment portfolio going forward. This is the reason why I preferred that, before one starts on investing, it is good to have a basic grasp of economics.

 

 

1 – The Bedokian Portfolio (2^nd ed), Chapter 11.

Comparing S&P 500 And Berkshire Hathaway

One of the reasons why I had recommended S&P 500 and Berkshire Hathaway (Berkshire) was that both were representative of the United States (U.S.) market, so in my opinion they are good choices for newbies to enter it.

The other reason for their inclusion, something which I did not highlight much about,

was their relative performance with each other; a comparison between the two as stated in the latest Berkshire letter to shareholders, over a 58-year period from 1965 to 2022, Berkshire returned compounded annual gain of 19.8%, as compared to S&P 500’s 9.9%¹. A USD 100 investment into Berkshire in 1965 will return around USD 2.42 million as at the beginning of 2023 versus S&P 500's roughly USD 22,400².

 

A Relook

 

For a more recent analysis, using Portfolio Visualizer, I had pulled out an in-depth view of the two counters. Available data for Berkshire Hathaway Class A share between Jan 1986 and Dec 2022 (Class A was chosen as it had a longer history than Class B, which was issued in 1996) was compared with the Vanguard 500 Index Fund Investor, acting as a proxy for the S&P 500.

 

During this period, Berkshire's compounded annual growth rate stood at 15.23% against S&P 500's 10.42% (see Figure 1). Looking at rolling returns, which is of interest to long term investors, the average 10-year and 15-year for Berkshire stood at 14.30% and 12.87% respectively, with S8P 500's average 10-year and 15-year at 9.93% and 8.54% respectively (see Figure 2).

 

Fig.1: Returns and other data between Berkshire Hathaway and Vanguard 500 Index Investor, Jan 1986 to Dec 2022. Source: Portfolio Visualizer. Click to view larger.

Fig.2: Rolling returns between Berkshire Hathaway and Vanguard 500 Index Investor, Jan 1986 to Dec 2022. Source: Portfolio Visualizer. Click to view larger.

 

Why The Difference?

 

Berkshire is currently helmed by two of the greatest investors known by many: Warren Buffett and Charlie Munger. Part of their successes can be attributed to their value investing methodology (discounted cash flow and intrinsic value), looking for great companies (having a wide "moat") and having the virtue of patience ("be fearful when others are greedy..."), to name a few.

 

Investing in Berkshire is like investing in an actively managed fund, just that you need not pay the high fees that are associated with it. Being a "fund", Berkshire has the discretion to buy and sell companies within its portfolio as it deems fit.

 

This is unlike the S&P 500 in which the investment vehicles following it (e.g., exchange traded funds, unit trusts, etc.) must at least replicate most of the holdings of the index itself, thus there is no freedom of selection.

 

Another overlooked aspect of Berkshire is it holds both public and private companies. You may have heard about it having close to 50% of holdings in Apple, but that does not mean 50% of Berkshire's invested funds are in Apple. Notable private companies under Berkshire's belt included See's Candies, Duracell and insurance companies GEICO and Gen Re. These private companies would have contributed further to Berkshire's returns. Also, it is from its insurance arm that Berkshire can garner the cash power to purchase equities using insurance float (difference between premiums and claims paid out).

 

Why Still Need S&P 500?

 

Despite the superiority of Berkshire's past performance over S&P 500, the latter is still included in a U.S. market beginner's toolbox. The reason is obvious: diversification.

 

Both Berkshire and S&P 500 represented different microcosms of the U.S. market and economy in general, and having them would be the closest thing in getting one's fingers dipped into the whole U.S. market and economic pie.

 

Furthermore, the management and investment decisions of Berkshire would have to be handed over to the next generation after Buffett and Munger, which there may be some deviations in investment methodology and decision-making process. The term “past performance does not indicate future results” is to be reminded of.

 

Contrasting to S&P 500, as an index, the inclusion of companies followed a set of requirements, which included market capitalisation, profitability and liquidity. This captures the essence of the microcosm analogy described above as the S&P 500 showed the current sectoral and industrial trend of the U.S.

 

And to conclude this post with a fact: S&P 500 contains Berkshire, too, and it is among the top 10 constituents by index weight³.

Disclosure

The Bedokian is vested in Apple, Berkshire Hathaway and S&P 500 via the SPY ETF.

Disclaimer

 

1 – Berkshire Hathaway Inc. Shareholder Letter 2022, p2. https://www.berkshirehathaway.com/letters/2022ltr.pdf (accessed 30 Sep 2023)

 

2 – Berkowitz, Bram. If You Have Invested $100 in Berkshire Hathaway in 1965, This Is How Much You Would Have Today. The Motley Fool. 3 Jan 2023. https://www.fool.com/investing/2023/01/03/if-invested-100-berkshire-hathaway-1965-how-much/ (accessed 30 Sep 2023)

 

3 – Equity S&P 500. S&P Dow Jones Indices. 31 Aug 2023. https://www.spglobal.com/spdji/en/idsenhancedfactsheet/file.pdf?calcFrequency=M&force_download=true&hostIdentifier=48190c8c-42c4-46af-8d1a-0cd5db894797&indexId=340 (accessed 30 Sep 2023)

In For The Long Haul

The United States (U.S.) Federal Reserve had signalled a few days ago that there would be one more interest rate hike before the year ends, and that the rates would be held steady for a longer time.

The latter point above would have severe downstream repercussions for the markets and economies. Optimistic predictions and estimates of a drop in interest rates in at least the first half of 2024 had evaporated, and with such high numbers, leverage itself had turned to the other edge of the sword and cut into companies and organisations so used to having cheap loans.

 

This meant companies and real estate investment trusts (REITs) with high gearing, lower fixed rate loans, shorter debt maturity profiles and/or poor cash flow would be in for a ride in trying to navigate these high-rates waters. This is why in your fundamental analysis, it is important to select healthy companies and REITs for your portfolio.

 

On the other hand, cash and short-term treasuries are experiencing high yields. With Singapore’s interest rates somewhat correlated with the U.S. side, the past year or so had seen the popularity of erstwhile boring treasury bills (T-Bills), Singapore Savings Bonds (SSBs) and banks’ fixed deposits.

 

We are entering into relatively new stage of our investing life. Never had we seen a sharp rise of inflation and interest rates within a short time, and the last time this happened was in the last century’s 70s and 80s. For those whose investment portfolios were formed after the 2008/2009 financial crisis, like myself, this is unexplored territory. Yet, if your investment journey is a quarter/third/half way, you still have a long runway ahead of you, and definitely it will be full of events, good and bad.

 

However, if you do the following two things, your investment journey would be less daunting and you are better prepared for the things to come. 

 

The first is to stay diversified; it has been demonstrated in the past that different asset classes have different correlations with one another in different market and economic situations. Coupled with the act of rebalancing, your investment portfolio could at least withstand the storms with lesser detriment while enjoying some fruits during fine weather.

 

The second is to remain calm in good times and bad. Do not get overhyped when every day is a Sunday and gloomy when every day is a Monday. Follow through your tested investment philosophy and style methodically, which in this way the element of emotion is reduced.

 

Remember, we are in for the long haul, so keep calm and stay invested.

Of Custodians And Ringfencing

Occasionally there will always be a question popping up on the safety of having one’s securities in a custodian account. Time and again, some people will have the impression that if the brokerage who is holding their shares in custody goes under, there goes the shares. And I am quite surprised that due to this, a few investors would rather invest locally and have their shares custodised with the Central Depository, or CDP, which to me is a missed opportunity on diversifying into other markets outside of Singapore.

This thinking is not without basis. In 2011, a now-defunct U.S. based commodities brokerage firm MF Global had misused customers’ funds by using them to cover their liquidity shortfalls, and there were Singapore customers included. It was till 2016 that MF Global’s liquidators returned all the funds to the affected customers. Due to this experience, I have heard of at least one ex-MF Global client swearing off custodian accounts.

 

By legal right, the assets of investors are separated from the assets of the brokerage with whom the investors invest with. This is the “ringfencing” described in the title. In the rare event where the creditors are acting against the brokerage, they are going after its assets, not the investors’.

 

As the adage goes, however, anything can happen, and skeptics will argue the scenario of another “MF Global happening” and if so whatever safeguards and legal protections would be thrown into the wind. I do not dispute of such possibilities manifesting, since I acknowledge that there are many risks involved in investing, though in terms of probability, it is very rare.

 

Rather than restrict oneself from investing in overseas markets (or local markets if wanting cheaper transaction costs), why not diversify across different custodian brokerages? Recent years had seen several discount brokerages popping up, and adding a layer of safety and security is that they are (mostly, if not all) licenced by the Monetary Authority of Singapore. Perhaps these may convince those to try out (or retry) custodian brokerages, and from there, invest in the rest of the world?

 

 

References

 

Ross, Marc L. What Happened At MF Global? Investopedia. 17 Jan 2023. https://www.investopedia.com/financial-edge/0312/what-happened-at-mf-global.aspx (accessed 17 Sep 2023)

Portfolio Pivoting

We had made a major pivoting decision with regards to our Bedokian Portfolio. It was not an overnight decision and sudden course of action. The transformation had taken place for the past six to nine months.

Okay, so what is the pivot all about?

 

For our Bedokian Portfolio built with our disposable income, we had followed the balanced allocation since its inception, which was 35% equities, 35% REITs, 20% bonds, 5% commodities and 5% cash.

 

Then what is our new allocation?

 

That would (currently) be 40% equities, 35% REITs, 15% bonds, 5% commodities and 5% cash. Basically, we had reduced the bond component by 5% and added it to the equities part.

 

I could call this “balanced-plus” Bedokian Portfolio, or “aggressive-minus” (for information, the aggressive Bedokian Portfolio make-up is 40% equities, 40% REITs, 10% bonds, 5% commodities and 5% cash)¹, because it sits right in between balanced and aggressive.

 

Okay, it is just a shift of 5% from bonds to equities.

 

But that is not all. To “complicate” things a bit (and not advisable for passive investors), the combined equities-REITs would stand at 75%, with either component not going above 60% of the 75%, or below 40% of the 75%. In other words, we are “free-floating” the two asset classes between 60/40 and 40/60.

 

The next thing popping up in your mind would probably be “why the pivot?”.

 

After a few lengthy discussions with my other half, we had settled (somewhat) at an age where we would “step-down”. Contrary to “retire early”, step-down would be when we intend to leave the rat race and settle for a job with lesser responsibility (and lesser pay) and/or a more freelance role (and lesser pay). Several major factors contributed to the age number, and that includes our children’s age of entry to the workforce, the maturing amounts of our savings plans, the CPF amounts that we (might) take out to augment the Bedokian Portfolio, etc.

 

With our current runway, we decided to accelerate things a bit by going slightly aggressive not just on our Bedokian Portfolio, but on our investments via CPF and SRS, too. The key word is “slightly”; we are not going full retard into 100% equities. Diversification is still key in our overall approach.

 

 

1 – The Bedokian Portfolio (2^nd Ed) p75