Saturday, November 14, 2009

How to invest in gold

How to invest in gold

HISTORICALLY, gold is perceived to be a safe haven during uncertainties and economic crises as it is considered more stable than other asset classes. It is generally an effective hedge against inflation and fluctuations in the US dollars.

Gold is an investment tool for preservation of wealth and a store of value in times of market volatility. It is an asset diversifier that could lower the overall risk in an investment portfolio.

In the previous article, we discussed the benefits of investing in precious metals and particularly gold. This article will focus on different ways to invest in gold.

Gold and gold-related funds

Gold and gold-related funds are unit trust funds that allow individuals, corporations and institutions with common investment objectives to pool their money for investment in gold and other precious metals. Professional fund managers then use the pooled money to acquire assets which will help meet those objectives.

Generally, a gold fund invests in gold mining equities and/or gold bullion accounts, while a gold-related fund invests in gold and other precious metals including platinum, silver, rhodium and palladium.

"By investing in such funds, investors benefit from diversification in their investments as fund managers buy stocks in more than one gold mining company or more than one type of precious metal," said Datin Maznah Mahbob, chief executive officer, Funds Management Division of AmInvestment Bank Group.

The funds also provide investment opportunities that allow investors to benefit from the investment expertise of fund managers who manage the funds.

In Malaysia, the only gold fund is opened to high-net-worth individuals with the minimum investment set at US$150,000 (RM513,000). For gold-related funds, investors can invest as little as RM1,000 to enjoy diversification in their investments and take advantage of professional fund management.

Gold exchange traded fund

An ETF is a unit trust, listed and traded on a stock exchange. It is an open-ended fund that tracks or follows the performance of a benchmark index.

An index is made up by a basket of securities and usually reflects the movement of an entire market. This gives ETF investors the opportunity to invest in a pre-packaged basket of securities of an index rather than just an individual security.

"Gold ETFs allow investors to buy and sell gold ETF units just like how they trade stocks on a stock exchange. Generally, gold ETFs track gold indexes or the price of gold. The ETFs invest in gold mining stocks to track the gold index," she added.

Gold ETFs, which track the price performance of the gold bullion, enable investors to participate in the gold market without taking physical delivery of gold. This is because it is 100 per cent backed by physical gold held mainly in allocated form. Allocated gold refers to the gold kept in a vault under a safekeeping or custody arrangement and the investor has total ownership to it.

The first gold exchange-traded fund Gold Bullion Securities listed on the Australian Stock Exchange since March 2003 is fully backed by gold, which is deposited and insured.

For SPDR Gold Shares listed on the Singapore Stock Exchange, the underlying gold is stored in the form of 400 ounces London Good Delivery bars in a bank vault.

"Gold ETFs are considered a passive investment. This means that upward movement of gold prices or gold indexes will be followed by the appreciation of ETF unit prices," said Maznah.

There is no gold ETF offered in Malaysia yet, but local investors can invest in Singapore-listed SPDR Gold Shares which are available closer to home. They need to have a foreign trading account offered by a local securities firm to trade the ETF. On top of that, their investment is subject to currency risk since the gold price is quoted in US dollars while the ETF is in Singapore dollars.

Physical gold investment

Some investors prefer to invest in physical gold including jewellery, gold bars and coins to have physical possession of the assets. Gold is an asset appreciated for its intrinsic qualities and beauty.

Investors have the option to buy gold bars in a variety of weights and sizes, ranging from one troy ounce to 400 troy ounces from some banks and jewellery shops. For instance, a local gold trading company offers gold bars and coins of 20 grams at RM2,415, 50 grams at RM6,010, 100 grams at RM11,964 and 1 kilogram at RM119,644 as at September 15 2009.

Investors can also invest in bullion coins offered in different weights of 1/20, 1/10, 1/4, 1/2, and one ounce. The actual value of bullion coins is based on the daily gold price and the gold content. They can buy bullion coins including the American Eagle, Australian Kangaroo Nugget and the Canadian Maple Leaf.

"To make direct investment in physical gold, investors need to set aside a bigger sum of investment compared to buying units in gold funds and gold ETFs. It is not as convenient as they have to think about safe storage and insurance for the precious assets," added Maznah.

Mining stocks

Mining stocks or equities are shares of ownership of a precious metals mining company. The stocks entitle the investor to receive profits from the operations of the company, usually by payment of a dividend, and to any voting rights attached to the stocks. Factors affecting the appreciation potential of a gold mining stock include market expectations of the future gold price, the future earnings and growth potential of the company, mining costs, and the likelihood of additional gold discoveries.

In general, prices of gold mining equities are more volatile than gold prices, thus some gold mining company equities decline when gold prices increase. The short-term volatility of the equity prices could be due to some gold mining companies hedging their future output using gold futures contracts. In the long-term, generally prices of gold mining equities could match the longer-term price trends of gold bullion.

"Investors do not enjoy diversification in their investments when they buy stocks of one gold mining company. They need to allocate more money to buy stocks of different companies to diversify their holdings," explained Maznah.

Gold passbook account

Another option is investors can buy gold in 999.9 fineness using a gold passbook account. Whenever they buy and sell gold, the transactions will be recorded in a passbook provided to the account holders. With the account, they can buy and sell gold at daily quoted gold prices for 1 gram in Malaysian ringgit. The account is normally backed by physical gold.

There are banks in Malaysia that require investors to deposit and trade a minimum of 5 gram of gold. The bank allows investors to make withdrawal in either physical gold or cash credited to their deposit accounts. They will incur a conversion charge inclusive of the shipping and insurance for the physical withdrawal.

One of the disadvantages for this type of investment is account holders do not get any interest or dividend for their investment. They generate profits only if they sell the gold at a higher price compared to their initial investment. The banks normally impose a charge of up to 5 per cent based on the gap between the selling and buying prices to cover administrative and storage expenses.


Now that you have understood the different ways of investing in gold, you need to compare them in terms of diversification, affordability and the advantage of professional management. On top of that, you should consider and select the investment options based on your risk tolerance as well as investment goals and objectives.

* This article is contributed by the Funds Management Division of AmInvestment Bank Group

Sunday, November 08, 2009

Understanding capital terms Capital Protected vs Capital Guaranteed

There is always an element of risk where investing is concerned. It is just a matter of whether people take the time to read the fine print and understand the risks they are exposed to when they invest.

Most investors in financial products would have come across the terms “capital guaranteed fund” and “capital protected fund”, but whether they understand these terms well is another matter, even if these terms are explained in the prospectus.

Basically, a capital guaranteed fund is a fund where the investor’s principal is fully protected. The fund usually invests most of the money in low-risk instruments such as government bonds, with only a small amount in riskier assets. Consequently, the returns are lower.

In a capital protected fund, the protection may involve a variety of instruments, the performance of which will determine whether investors retain, lose some or all of the principal amount invested.

In many instances, capital protected products have been sold to investors, with the impression – perhaps unintentionally – that they will not lose the principal sum at maturity.

However, the fine print will inform the investor on how the banks or other financial institutions intend to protect the sum invested. In the years before the global financial crisis, this usually involve securities known as options, swaps or collateralised debt obligations (CDOs).

Unfortunately, many investors, including seasoned ones, do not understand the risks involved when such assets are used to securitise their investments.

There are those who cannot even differentiate between capital guaranteed and capital protected.

We now know that CDOs, especially those with asset-backed securities linked to subprime mortgages, were among the chief culprits in the collapse of the US financial system.

The stark reminder of what can happen when people invest their money with only half an understanding of the risks involved, hit closer to home when the financial crisis peaked more than a year ago with the bankruptcy of Lehman Brothers Holdings Inc, which also saw the near collapse of insurer American International Group Inc.

Among those affected were investors in Hong Kong and Singapore, who invested in the Lehman minibonds, which were first issued in 2002. Investors of Singapore-based DBS Group Holdings Ltd’s “high notes” as well as Merrill Lynch & Co’s “jubilee notes” were also affected.

These people invested in what is known as structured deposits or structured notes, which were capital protected not capital guaranteed.

Anecdotal evidence gleaned from news reports from last year show that often these investors do not understand what they were investing in or have been misled into believing that they had invested in risk-free products.

Most of them, whose demonstrations outside the banks were captured on television, saw a significant part of their life’s savings evaporate in the wake of the financial crisis.

One consequence of the massive losses incurred by investors last year was the banning of the term “capital protected” by the Monetary Authority of Singapore (MAS).

In a statement in early September, MAS said the ban on the term would apply to mass-market products familiar to retail investors, including structured notes, unit trusts and investment-linked life insurance policies.

According to Singapore’s Straits Times, financial institutions in Singapore now have to provide customers with simple, user-friendly ‘product highlights sheets’ and providing ‘health warnings’ on complex investments in appropriately large font.

There are those who will also post the question of how sound the financial institution providing the guarantee for capital guaranteed products are, especially since the financial services industry have seen so many banks get in trouble or go bust between July 2007 (when the subprime crisis began) and now.

One way to find out is to look at the credit rating and balance sheet of these guarantors, which are usually public information.

Otherwise, information on the guarantors are also available on the prospectus of the fund.

A website on investment education had this to say about capital guaranteed funds: “When we invest with little or no risk, we pay for it by compromising on potential returns.”