Tuesday, July 21, 2009

How to become a gold investor

GOLD investing is not simply a matter of buying a piece of the metal to lock in a safe place. There are many ways to own gold and, quite often, you do not see the actual thing at all. For instance, Singaporeans can buy gold by using their Central Provident Fund Ordinary Account savings to invest in gold savings accounts or gold certificates. Their value mirrors any rises or falls in gold prices.

Bars and coins

ONE way to get your hands on gold is to buy products such as gold bullion coins and gold bars in various sizes and weights. These investments - unlike a paper gold investment - are subject to goods and services tax (GST) in Singapore, which means an investor will lose 7 per cent of his investment upfront.

Coins are usually available in denominations of one ounce, 1/2 ounce, 1/4 ounce, 1/10 ounce and 1/20 ounce.

When investors sell gold to a bank, for instance, the institution will want to make a profit on the prevailing gold price. That differential starts from about S$120 per kg.

Banks that sell physical gold include United Overseas Bank (UOB) and the Canadian Bank of Nova Scotia.

Certificates

WHEN you buy a gold certificate, you do not incur GST, as you do when you buy physical gold. However, there is an annual administration fee of S$30 per kg of gold.

At UOB, a gold certificate is issued in 'kilobars', which are kilogram bars of gold. In a single certificate, you can buy kilobars of 999.9 fine gold in multiples of one up to a maximum of 30. Gold is rated according to its purity - and 999.9 means extremely pure.

At current gold prices, one kilobar costs about S$35,000.

For die-hard gold investor and retiree Christopher Na, it has been a painful wait to see his investment shine. His foray into gold began in 1993 when he pumped his life savings of about S$200,000 into 11kg of gold, which he bought at US$330 (S$483) per ounce.

He prefers to buy gold certificates as they do not incur GST. He also opted for certificates because he wanted to buy more gold by borrowing money using his certificates as collateral.

So far, he has piled up 29kg of gold in gold certificates from UOB and has taken out bank loans of about $500,000. Based on the current price of US$760 an ounce, his 29kg investment is worth about $1 million.

Mr Na does not mind paying the monthly loan interest of S$3,000. 'As long as the price of gold rises beyond what I pay for the interest, I will keep on buying gold.'

Savings accounts

AN INVESTOR looking for the excitement of frequent trading might want to consider a gold savings account.

You start with a minimum purchase of 5g of 999.9 fine gold. You can then buy or sell in 1g lots.

The customer records his purchases and sales in pocket-sized passbooks as deposits and withdrawals. UOB charges an administration fee that is subject to GST.

Margin trading

CUSTOMERS can also open a margin trading account to trade London gold or gold futures over the phone on a margin basis.

They can even sell short in gold with the account.

Unit trusts

ANOTHER option is to invest in unit trusts such as UOB United Gold and General, which invests in publicly listed companies that mine gold.

As with other unit trusts, an investor is subject to subscription and annual management fees, said IPP Financial Advisers investment director Albert Lam.

Exchange-traded fund (ETF)

FOR retail investors, an ETF offers a convenient way to buy gold with relatively modest sums, and without the custody, storage and insurance charges that typically accompany bullion investments.

An ETF is listed on a stock exchange, and is bought and sold just like shares.

In February, investor Dennis Ng pumped 5 per cent of his investment portfolio into StreetTRACKS Gold ETF. Since then, the value of his investment has risen nearly 20 per cent, to US$75 a share. His initial investment cost him US$63 a share.

Already listed in New York and Mexico, this gold ETF was listed on the Singapore Exchange last year.

ETFs are tracker funds that invest in the component stocks of an index. Investors need not pay a sales charge, unlike with a unit trust. They are, however, subject to a brokerage charge. Overhead costs are typically a fraction of those for unit trusts.

Unlike other ETFs that hold shares or bonds, StreetTRACKS holds gold bullion as its underlying asset. Its annual management fee is 0.4 per cent. A share in the ETF is based on roughly a tenth of an ounce of gold. Buy 10 shares and you own one ounce of gold.

Mining stocks

THIS means investing directly in the shares of mining firms. However, you could be exposed to more risks.

With most gold investments, you worry mainly about the price of gold. With these stocks, other factors, such as how well the firms are managed, come into play.

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