Unveiling the Allure of Gold: Exploring Its Enduring Status as the Timeless Safe Haven Asset
Throughout history, gold has been revered as a symbol of wealth and status. Its unique properties have made it one of the most coveted precious metals, cementing its status as a reliable store of value especially during turbulent economic times.
In today’s uncertain global financial landscape, gold remains a go-to asset for investors looking to hedge against various risks. By understanding the intricacies of the gold market, investors can make informed decisions on adding exposure to gold in their portfolios.
In this blog, we explore the gold price dynamics in Singapore Dollars and analyze the factors to consider for Singapore-based investors.
The Allure of Gold
Gold has served as money, jewellery, and store of value for thousands of years. Its allure stems from its scarcity, durability, divisibility, transportability, and resistance to counterfeiting. These attributes have established gold as a trusted medium of exchange and stable repository of value over the long run.
Throughout history, gold has maintained its purchasing power remarkably well. According to the World Gold Council, gold today buys a similar amount of various asset baskets as it did a hundred years ago. This is in stark contrast to fiat currencies which have lost significant purchasing power due to inflation.
Consequently, whenever economic crises or uncertainty strike, investors gravitate towards gold as a safe haven asset to preserve their wealth. This was evident during the 1970s oil crisis, Black Monday in the 1980s, the Dot Com bubble burst in 2000, and the 2007-2008 global financial crisis when gold prices surged dramatically.
Gold in the Current Economic Environment
The world economy today faces an assortment of risks including lingering effects of the COVID-19 pandemic, extended periods of high inflation, rising interest rates, geopolitical tensions, and high sovereign debt levels globally.
Central banks responded to the pandemic with aggressive monetary stimulus, but this excessive liquidity has stoked inflationary pressures worldwide. As of August 2022, inflation in the United States hit 8.3% while Singapore also saw inflation rise to 7% – an over 14-year high.
To curb inflation, central banks have embarked on interest rate hikes, sparking concerns over their impact on economic growth. Markets also remain jittery over the Russia-Ukraine conflict, China’s slowing economy, and deepening global economic fragmentation.
In this uncertain climate, gold has reaffirmed its safe haven status with strong price gains this year. As of August 2022, gold prices have increased by over 11% from the start of the year.
Drivers of the Gold Price
As a globally traded commodity, the international gold price depends on a variety of factors:
- Global Economic Outlook – Positive economic data and sentiment boosts appetite for risk assets like stocks, directing funds away from gold and lowering its price. Deteriorating economic prospects increases gold’s attractiveness.
- Inflation and Real Interest Rates – High inflation typically spurs gold investment to offset currency debasement. Real interest rates (interest rates minus inflation) also influence gold prices. Falling real rates boost gold’s appeal by decreasing the opportunity cost of holding non-yielding bullion.
- Central Bank Policies – Dovish monetary policies involving low interest rates and asset purchases support higher gold prices by keeping bond yields low and stoking inflation fears. However, aggressive tightening policies to control inflation have a dampening effect.
- Currency Fluctuations – Since gold is dollar-denominated, a weaker dollar tends to drive up gold prices in other currencies, and vice versa. This impacts demand from foreign investors.
- Geopolitical Uncertainty – Geopolitical tensions such as conflicts, wars, and political turmoil increase safe haven demand for gold, driving up its price.
- Investor Activity – Gold prices rise when there is high investment demand from institutions and retail investors in the form of exchange-traded funds (ETFs), bars and coins. Heavy selling has the opposite effect.
- Jewellery Demand – Demand from the jewellery sector, especially in Asia, influences gold prices. Heightened demand supports higher prices.
- Mine Supply – The costs of mining and production impact the gold supply. Major disruptions due to geopolitical, labor or other issues constrict supply and tend to increase prices.
Understanding Gold Price Dynamics in Singapore
For Singapore-based investors, it is important to analyze the gold price in local currency terms. The dollar price of gold dominates headlines, but currency fluctuations can significantly impact prices.
The gold spot price in Singapore dollars is simply the USD spot gold price converted to SGD based on prevailing forex rates. Here are some key points that affect the gold price locally:
- USD-SGD Exchange Rate – Since gold is internationally quoted in US dollars, the USD/SGD exchange rate directly impacts the domestic gold price. A weaker Singapore dollar against the US dollar leads to higher SGD gold prices.
- Regional Influences – Singapore’s financial markets are heavily intertwined with its ASEAN neighbors and North Asia, so gold pricing dynamics in these regions influence local investor demand and prices.
- Domestic Inflation and Interest Rates – Rising Singapore inflation or lower interest rates boost local gold demand for hedging and asset diversification, buoying prices.
- Government Policies – Singapore’s pro-business environment and stable politics lend support to gold demand and elevate its status as a financial hub where gold is actively traded.
- Local Jewellery Market – Demand from Singapore’s sizeable retail jewellery market affects gold prices at the margin, though the influence is limited.
Top Ways for Singapore Investors to Access Gold
Singapore offers diverse options for investors keen to allocate funds into gold:
- Gold Bullion Coins and Bars
Purchasing physical gold in the form of bullion bars and coins allows investors to own pure gold at close to spot prices. Popular coins include Gold Eagles, Maples, and Philharmonics. Dealers like BullionStar and Silver Bullion allow purchase of varied sizes. Investors must consider secure storage options.
- Gold Jewellery
For many, purchasing exquisite gold jewellery represents an emotional investment and combination of adornment with financial value. Gold jewellery does attract GST, which means you are not getting spot price on purchase as you need ot factor in workmanship plus GST, you will only get the GST back when you sell the gold as scrap back to a jewellery company or pawnbroker but wont recover the workmanship and will have to sell at a discount to spot. Designs range from modern to traditional.
- Gold ETFs on SGX
SGX offers the SPDR Gold Shares (under SGX trading name “GLD US$” and “GLD SG$”). This provide direct gold exposure without dealing with storage and trading at close to NAVs. ETFs also offer intraday liquidity. You can even buy gold ETF’s using your CPF Account.
- Mining Stocks
Shares of gold mining companies provide leveraged exposure to physical gold prices. Not many active miners listed on SGX include Southern Alliance Mining Ltd SGX:QNS or Fortress Minerals Ltd SGX:OAJ. However, stocks come with their own unique risks and I’d say stay away from illiquid market.
- Gold Certificates
Banks like DBS, OCBC and UOB offer gold savings accounts and certificates that allow investment in specific grammage of gold at prevailing rates without handling physical metal. Accounts can be funded incrementally. Personally I think Banks charge the highest in the market for such products so I would not consider them.
- Gold Trading on SGX (another dead contract)
Launched in 2020, the SGX Gold Futures contract provides means to trade gold exposure using derivatives with physical delivery optional. Sadly another illiquid futures contract launched by SGX, clearly did not think it through properly and so as usual it just stopped trading and died without an announcement.
- Trackers / CFDs
For paper gold exposure, brokers like FSMOne and Tiger Brokers offer gold trackers and CFDs that mimic gold prices. These provide leverage rapidly, but are meant for short-term trading only. Do you due diligence on them as a counterparty risk before opening an account.
- Jewellery Retail Platforms
Online jewellery retailers like Aspial, SK Jewellery, and Goldheart allow buying 24K gold jewellery from the comfort of home. Pieces can be purchased for adornment, gifting, and investment.
Effective Approaches to Gold Investment
Adding exposure to gold can diversify and enhance portfolio resilience during downturns. Here are some tips for incorporating gold astutely:
- Maintain a long-term outlook when investing in gold rather than focusing on short-term price changes. Gold is subject to volatility.
- Limit gold allocation to 5-10% of a portfolio. Higher amounts concentrate risk and reduce diversification.
- Consider timing gold purchases during periods of currency or price dips and reduced volatility to lock in at lower prices.
- Allow periodic rebalancing of gold positions relative to other assets to ensure allocations remain aligned with investment objectives (but remember you don’t own the physical gold yourself, that still belongs to the company offering the ETF), so choose wisely, remember Bear Stearns and Lehman Brothers? Exactly!
- Prefer gold ETFs, certificates, and futures over physical gold to avoid storage hassles while still benefiting from gold price movements.
- Use dollar-cost averaging when building physical gold exposure through monthly purchases to reduce timing risks.
- Purchase gold from trusted dealers like BullionStar and Silver Bullion to ensure product authenticity and quality.
- Opt for smaller denomination coins and bars, like 1g or 10g, for easier liquidation and to meet investment thresholds.
- Store physical gold securely in certified vaults and use private vaulting services for access control and reduced risks.
Singapore investors considering expanding their gold exposure should keep abreast of developments likely to influence prices:
- The outlook for continued interest rate hikes by the US Federal Reserve to combat high inflation.
- Signals on monetary tightening by central banks worldwide to restrain inflation in their jurisdictions.
Here are some additional factors that can influence the gold price in Singapore dollars:
- Demand from China and India – As major gold consuming nations, trends in gold demand from China and India impact worldwide prices. Increased demand from these countries tends to lift global and Singapore gold prices.
- Central bank policies – Gold purchases by central banks signals confidence in the metal and supports prices. If major central banks become aggressive sellers of gold, it can dampen prices.
- Commodity prices – There is some correlation between gold and oil/industrial metal prices. Rising commodity prices tend to lift gold prices as well.
- Bond yields – Declining bond yields enhance the appeal of non-interest-bearing gold. The reverse causes some investors to prefer bonds over gold.
- US dollar performance – The US dollar is a major component of Singapore’s SGD NEER basket. A weaker US dollar makes gold cheaper for holders of other currencies, increasing demand.
- GDP growth – Robust GDP growth engenders optimism and lifts appetite for risk assets rather than gold. However, sluggish growth can send investors scrambling back to gold.
- Technological developments – Advances that make gold mining/recycling more efficient impact production costs and supply levels, moving gold prices.
- Regional gold demand – Gold demand patterns in neighboring countries like Indonesia and Thailand influence Singapore prices to some degree.
- Government gold reserves – Changes in Singapore’s official gold reserves held by the Monetary Authority of Singapore can support or dampen gold prices at the margin.
- Festive and wedding season – Seasonal demand spikes for gold jewellery during festive occasions and the wedding season in Singapore and Asia can provide modest support to prices.
The US dollar has a major influence on gold prices globally, including in Singapore. Here’s a detailed look at how the US dollar impacts gold locally:
- Inverse relationship – The US dollar and gold typically have an inverse correlation. A weaker US dollar makes gold cheaper for foreign currency holders, increasing demand and buoying prices. A stronger greenback has the opposite effect.
- SGD NEER link – Singapore Monetary Authority manages its currency against a trade-weighted SGD Nominal Effective Exchange Rate (NEER) basket. The US dollar accounts for a decent percentage of the basket, the largest component. So dollar moves sway the NEER and affect SGD-gold rates.
- Fed policy – Interest rate hikes by the US Federal Reserve strengthen the dollar. This dampens gold prices as the opportunity cost of holding non-yielding bullion rises versus dollar-denominated assets like Treasuries.
- Safe haven dynamics – Sometimes, if the dollar weakens due to risk-off sentiment, investors rush to gold as an alternative safe haven. But the inverse relationship tends to dominate.
- Import costs – Singapore is a major gold importer. A weaker US dollar reduces the relative costs of dollar-priced gold imports, improving profitability for dealers and allowing some price reductions.
- Inflation hedge – Since a weak dollar often coincides with rising inflation, investors increase allocation to gold as an inflation hedge during such periods, propping up prices.
- Technical trading – US dollar strength or weakness can trigger technical trading in gold by speculative traders and algorithms, amplifying price movements.
- Demand shifts – A weaker greenback makes gold more alluring for buyers in China, India and other major markets. This spurs demand and supports global and Singapore prices.
Overall, a bearish dollar tends to be bullish for gold prices in Singapore, while a bullish dollar weighs on gold. Investors should monitor the dollar’s value when making gold allocation decisions.
In closing, gold remains a unique asset that can provide stability amidst market uncertainties, geopolitical turmoil, and currency debasement. For Singaporean investors, having exposure to gold can hedge against various risks present today like high inflation, rising interest rates, regional slowdowns, and currency fluctuations.
By understanding the key factors that drive gold prices in Singapore dollars, investors can make judicious allocation decisions when it comes to adding gold to their portfolios. The historical performance and enduring qualities of gold that make it a trusted store of value for centuries also lend support to having some portion of investments in this precious metal.
However, moderation is key and investors should be wary of overexposure. With prudent investing and robust due diligence, gold can offer Singaporeans an additional means to diversify their wealth preservation strategies.
Disclaimer: Investing in gold or its related products carries inherent risks and should be approached with caution. The information provided in this post is for educational and informational purposes only and does not constitute financial advice.
The decision to invest in gold or any other investment vehicle should be based on thorough research, understanding of the market dynamics, and consultation with a qualified financial advisor. It is important to note that the value of gold can fluctuate and may be influenced by various factors such as economic conditions, geopolitical events, and market sentiment.
Past performance is not indicative of future results, and there is no guarantee of returns or protection against losses. Investors should carefully consider their own financial situation, risk tolerance, and investment objectives before making any investment decisions.
The author and publisher of this blog post disclaim any liability for any direct or indirect loss or damage arising from reliance on the information provided. Investors are advised to conduct their due diligence and seek professional advice before engaging in any investment activities.