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How To Invest

How to buy gold, and why owning physical gold is a bad idea

In the early days of the pandemic, gold prices dipped then catapulted to all-time highs. The same thing happened too during the 2008 economic crisis. For decades and generations, gold and other precious metals (like silver) have been regarded as a good hedge against inflation and economic crises/recessions. Historically, gold has gained an average of 8% per year since 1970.

However, if you already own some gold as a form of investment, I hope it’s not stashed away in a safe/box in your bedroom. Before I go any further, this article assumes the gold that you own is pure gold (999 Gold or 24K gold) with gold purity certificates to guarantee purity/value. Jewellery like gold bangles, rings, and bracelets have lower purity levels of 14K or 18K and usually have lower resale value as ‘used gold jewellery’.

Here are two main reasons why buying physical gold is not a good idea.

1. Troublesome to buy and sell

It’s tempting, I know. An investment you can feel, see, smell, taste is one that is very assuring.

Nice to chew on too. Source

There are many ways to buy (pure) physical gold, in the form of gold bars, bullion coins or collectibles from banks and jewellery shops. However, unlike buying digital assets like stocks, buying and selling gold is a very tedious process.

Perhaps the pandemic has made me lazier, but the idea of going to the bank, taking a queue number, waiting in line for my turn to buy gold isn’t very appealing. It’s even worse when it comes to selling as there are many safeguards and checks in place.

For example, with UOB, gold coins or bars must be in good condition (determined by the bank), seal must be intact, and original invoices of purchase (must be in good condition) for a resale to happen. In the last decade, cases of counterfeit bars and coins increased dramatically due to the rapid rise of gold prices.

2. Security and storage

Precious items including gold should always be kept under lock and key not only to prevent theft (even in Singapore, low crime does not mean no crime), but also to prevent your kids from flushing your gold coins down the toilet bowl. To make sure that doesn’t happen (it’s also more likely than theft), an investment in a good and reliable safe is a must.

However, this means spending a good amount of money in a high-quality safe to protect your gold. But now, you have an additional thing to protect — the safe itself. So then you also buy an insurance plan as a safeguard against theft and accidents on your safe and your precious physical gold inside. Yes, the costs add up.

So should I still buy gold?

Yes, of course! Just not physical gold. Gold is a stable way to preserve wealth and hedge against market volatility. Here are a few great paper gold alternatives to consider:

  • Gold ETFs. The easiest way to own gold nowadays is to simply buy a gold exchange traded fund (ETF). For example, the SPDR Gold Shares ETF is the largest physically backed gold ETF in the world. This means the funds are used to buy real physical gold locked in vaults (far safer than your $300 safe at home). The ETF price is benchmarked to the price of gold bullion, giving investors an easy way to get exposure to gold prices without physically owning the precious metal. And since the ETF is listed on an exchange, you can easily buy and sell units like how you’d buy stocks.
  • Gold certificates. if you still prefer to buy gold locally from licensed sellers or banks, you can consider gold certificates. They are usually sold in kilobars (1,000 grams) — pricey, yes — but can be exchanged for cash (or physical gold) when you want to. However, there are also annual fees to consider.
  • Gold savings account. Finally, you can open a gold savings account that allows you to buy gold without physical delivery. Instead of dollars and cents, your gold account holdings and transactions are measured in grams. There is service charge to keep the account (UOB charges 0.25% p.a.).

The fifth perspective

All that glitters is gold, but owning physical gold involves storage and insurance costs and there are also transaction fees and markups that vary. With the options available nowadays, it is so much easier and cheaper to buy and sell gold without the hassle of storing physical gold yourself. Unless, of course, you just can’t help but love staring at gold all day long.

Russell Kua

Russell Kua is the firstborn to a stock broker who lost it all in the 1997 Asian Financial Crisis. Learning from those lessons since his preteen years, he is now debt free, a homeowner, and happily married with a son before his 30th birthday. Follow him as he writes about his journey to financial independence.

8 Comments

  1. Poor advice. Central banks hold physical gold as there is no counter party risk. It has been in use for at least 5000 years. So any serious investor should hold physical as well as digital gold. It was only 50 odd years ago that the US and then the world went off the gold standard so the US could print unlimited amounts of money not backed by ant precious metal. That’s how they have been funding their deficit

    1. Yup, definitely wouldn’t hurt holding both digital and physical gold. However, in high crime neighbourhoods and countries (where I grew up in), having too much physical assets/biscuit tin with cash under the mattress has its risks too. Safety is expensive!

  2. If you want to own Gold via an ETF there are other choices out there besides the SPDR Gold ETF (GLD). Although that’s a good one liquidity-wise, the MER (management expense ratio) is actually quite high at 0.40%. I think a good alternative (provided you have access to the US market via a suitable account) is the Aberdeen Standard Gold ETF Trust (SGOL) which has an MER of only 0.17%, and is also quite liquid (with a very narrow buy-sell spread). Another feature of Aberdeen Standard Gold ETF Trust is the smaller unit value, which is about one-tenth of the SPDR Gold ETF. So it’s easier to use if you want to dollar-cost-average in a few hundred dollars per month over time.

    State Street and Aberdeen Asset Management are equally good reputation-wise, and the underlying assets are the same. So I just think it’s best to shop for the ETF with the lower MER, as that’s actually going to eat into the value over time.

    I’ve got a simple approach to the gold component in my portfolio. Every time I sell something secondhand decluttering our home I put the proceeds into the gold ETF. Over time it really mounts up.

    1. Great advice, Jonathan! Yes MER does add up if Gold makes up a significant portion of a portfolio. Thanks for the suggestion!

    1. Aha! But high gas/fees involved between wallets. Cheaper/free and faster transactions between users within the same exchange (liquidity with Gold with the bank/exchange)

  3. Digging gold destroys our earth and is environmentally not friendly. So we decided not to invest in gold. Similarly, we chose not to use marble tiles during our house

    1. Very good point there, Song! Which reminds me, transporting gold (physically) from vault/source to individual investors must involve some form of transportation – flight/shipping and on-road transport with armoured vehicles and personnel. Large carbon footprint!

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