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.
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.
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.
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.
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 (2nd Ed), p38-41