Saturday, May 3, 2014

Investing in Gold and Silver in Singapore

I've been wanting to write a post like this for a while ever since I had a friend who told me she was interested in gold investing and asked me what options are available.

I have more to say about physical gold, but I think it's better that I write this post more as an overview first.

First thing first, gold and silver are precious metals. They are just "stuff" and they do not generate interest or dividends. They just are as is. When making an investment in gold or silver, you believe that the price of these pieces of metals are going to appreciate in whatever currency terms in the future, which you will then encash your precious metals and buy stuff with them.

Although throughout the article I will say "gold" a lot, I am actually using it interchangeable with all the other precious metals. They aren't the same, I know. I just don't care, I'm going to call them "gold" if it slips my mind.

Okay, so what are the choices available? There are not many I feel:

1) Physically owning and keeping
2) Physically owned and stored off-site
3) Owned in name, physical delivery impossible
4) Owned as part of a fund or ETF

So, let's run through these options.

1) Physically owning and keeping

This is the most straight forward and easy method that people have been using throughout the ages and how people typically think of precious metals investment. You simply go to a coin shop or a jewellery shop or anywhere that would sell such precious metals, you buy it, and you bring it back home and store it. Sometime in the future, you will sell it.

The pros of this method is the simplicity of it. You physically own the gold and there is no counter-party risks, as well as you can access it whenever you want. You do not need to pay for storage costs as well, which can be quite a chunk if your investment is small.

The cons is that you will be purchasing the gold at a premium over spot for physical delivery. Depending on the denomination of the investment being bought, the physical delivery premium for gold varies. Also, if your home gets robbed, well that's the end of it!

*as of 2/5/14, 10-11pm, checked against GoldSilverCentral, BullionStar and XE spot

** as you can see, the premium over spot for Gold starts out very high, and then gets lower as the size gets larger. Personally, I think the sweet spot is the 1oz coin. (~1670+ at time of writing)

*** for silver, the premium starts out lower, but it remains elevated throughout, even though it gradually gets lower. I think the sweet spot is a 10oz bar (~270+ at time of writing)

2) Physically owned and stored off-site

Next, you can physically own gold that is registered to your name, but you do not store the gold at home. This means, you either store it yourself in a Safety Deposit Box (SBD) or you keep it in storage with bullion sellers.

For the SDB option, you can probably get one at whichever bank that you bank with, or another option is actually with Certis Ciso! I know that POSB and DBS both offer SDBs, but of course, POSB has cheaper rates. Many of the other banks do offer SDBs as well, but I think you need to check if you bank offers one for sure. It might only be for VVIP customers!

The difference between storing on-site and off-site is also quite straight forward.

The pros is that you no longer need to worry about the security of your house and your investment, since it is tucked away safely somewhere else where you can always access it.

The cons is that you now have to pay storage fees! For SDBs, the charge of course is the lowest, since it is not specialized at all. For the bullion storage facilities, the charges can cheaper or more expensive, depending oh what you store in your SDB. (personal silver storage in a safety deposit box doesn't seem to me like it would be worthwhile because of it's larger mass, only gold or palladium)

For Silver Bullion's S.T.A.R, the charge is $9.86 per oz, or about 0.60% a year.
For GoldSilverCentral, the charge is $4.20 per oz, or about 0.26% a year. (min 1kg storing)
For BullionStar, 0.39% a year and one time fee of $149 to withdraw (free now actually, refer to a table below for more details)

All in all, I feel that the storage costs are still quite reasonable, especially if it gives you the piece of mind that your precious metal investments are locked up in a thick safe with your name on it, haha!

3) Owned in name, physical delivery impossible

Okay, this one is slightly confusing. You purchase the gold or silver in your own name, and the metals are specifically allocated to you, but.... you cannot have delivery?

That is the only catch to this form of investing in precious metals, you will never be able to get physical delivery, no matter how much you own!

The biggest and most well-known player for this is UOB and their (in)famous Gold and Silver Savings Accounts (GSA/SSA). Personally, I am not a fan. Their selling price and the premium over spot is comparable to the bullion sellers, which is pretty decent, BUT you still don't get physical delivery. So you're paying a premium for merely being allocated the metal, but not for the physical delivery! The premium you pay shouldn't be the same, it should be less!

On top of the unwarranted premiums (about 4% for 1oz of gold), the storage and admin fees are whack! For gold, it is 0.375% per annum, minimum 0.12g of gold charged a month  (~$200!). That means you need to own more than $960,000 to be charged at the minimum rate of 0.375% per annum. If that is the case, you are better own with BullionStar or GoldSilverCentral! Silver is charged at 0.2oz a month, which makes the optimal point $18,000! Unbelievable!

Clearly, I am unimpressed. Is there no better alternative than these bloodsucking banks? BUT THERE IS!

BullionStar has a very interesting facility, named the Vault Gram®. Why the Vault Gram? Well, it is exactly what you would think it is. You get to buy precious metals by the gram! As per this category of investment, your investment is physically backed and held in your name. However, you will not be able to ask for physical delivery. Similar to UOB, in the end, all you can do is sell your grams at the market rate and pocket the difference.

However, the difference between UOB and BullionStar is startling!

Regardless of the premiums listed on the website that is precalculated for you, I looked at the current spot rate on and manually calculated the premiums that I got, which is listed here.

Vault Gram® - Gold - 1.7% premium
Vault Gram® - Silver - 5.25% premium
Vault Gram® - Platinum - 2.6% premium 

I don't know if you realize, but I feel that the premiums are pretty low! Lower premiums than spot price, definitely for sure! Even 1g of Silver has a lower premium over spot than buying 100oz of Silver for delivery! So, in terms of the premium being lower than physical delivery, this is definitely a yes! Do note that you do have to add in the spread too, which is how much less they will buy back the precious metals from you when you decide to sell. For Gold, the all-in costs from to end in about 3%, for Silver it is 7.5% and for Platinum it is 5%.

Therefore, unless you are investing more than $5000 or 50g in Gold, $6000 or 100g in Platinum, you would be better off paying at the slightly higher premium and selling back at spot with no spread lost. However, it seems that in no circumstances that physical delivery of Silver would be cheaper than the Vault Gram! Of course, the value of having a precious metal physically in your possession also has a premium, so it is not crazy for people to still choose physical delivery for all their precious metal investments, regardless of the premium that they have to pay over ownership, but non-delivery.

Next, storage costs. What are the storage costs for Vault Gram? ZERO. YES, THAT'S RIGHT, ZERO!

Until the end of 2015, storing with Vault Gram is absolutely free. Well, if there's a time to the free storage period, then what about after the free period? Do they stick it to you and rob you blind now that your gold is stuck with them? No! The storage fees are a very respectable mere 0.09% a year! That means for every $10,000 investment, they take just $9 a year for storage!

I have just registered an account with them and I will be coming back soon with a review of my experience with them! I have very high hopes of them!

4) Owned as part of a fund or ETF

The last way possible for investors to make investments into precious metals is directly through ETFs or funds.

The SPDR GLD is listed on SGX and it is the largest physical gold ETF in the world, and it was at one time the largest ETF in the world as well. They do allow physical delivery - if you have 100,000 shares. And that is subject to meetings and approvals, and you might just be rejected and instead be offered the cash equivalent of those shares. In other words, there is no real certainty that you can get physical delivery! However, this is asset backed by physical gold bullion bars stored in a gold vault in London. The cons of this ETF is that it is priced in USD, meaning that you will be taking on currency risks, as well as the frictional costs.

There are other commodity ETFs that hold gold as a percentage of their asset allocation, but that isn't really cutting it as a precious metals investment.

What I have personally invested in is a mutual fund that invests in 75% spot gold, and 25% gold mining equities. It's not perfect, but I think it is pretty good.

First off, the one time sales charge is 0.75%, following a 2% annual expense ratio. That does not make it cheap. You would be indifferent of holding a physical bullion coin and investing in this fund for a year. However, as time goes by, it makes much more sense for the alternatives since the annual expense fee of 2% is rather high.

However, there are pros to this as well, let me try to list them out to make myself feel better about this investment.
1) Investments can in nice structured amounts ($5,000 or subsequently $1,000, instead of eg. $1683 for an oz of gold)
2) There is exposure to miners, which is a levered play on the metals as well. By my quick and dirty calculations, this makes it actually gives it an extra 25% or leverage, boosting returns (and also losses)
3) This was one of the few investments that was known to me in SGD, erasing the need to manage foreign currency and the USD, which is one of the main causes of price changes in gold
4) An integrated option with other other mutual fund investments that made it easy and simple to invest in

The fund itself holds 25% mining equities, 30% futures, and the rest are in physical-backed gold equivalents. I think I could have done worse, especially if I had decided to invest in precious metals with UOB. The mutual fund approach also helps me have strong hands and prevent myself from trading, but instead investing for the longer term.

In Summary

I have listed the options known to me that Singaporeans can choose if they would like to venture into investing into precious metals in Singapore. All these options were thought up with the local Singaporean in mind, since all of them are investments that can be made directly with the SGD. We all know that currency conversion costs can be minimally 0.3% round trip, up to over 2%. Hedging costs would also add in 1.5%, making direct investments into the gold or silver market through the USD quite an expensive option.

If you believe in the story of holding physical, you definitely should consider the first two options. The only drawback is of course, the higher initial premium over spot and the storage/insurance costs, which I have demonstrated to be actually quite negligible.

If you don't think the world will fall into apocalypse, but just that investing in gold and other precious metals now is a good idea and will give good returns going into the future, then I would recommend considering BullionStar's Vault Gram, especially if you only have small bits of capital to invest. Alternatively, I think that the Schroder's mutual fund is also not that bad of a choice, but definitely not as a very long term investment, more of a tactical leveraged play hoping for a spike in gold in the near future.

I am very enamored by Vault Gram, and I do think that I will personally give the website a try and see how it goes for me. 

Disclaimer: I have just registered under the BullionStar affiliate program. I personally believe in their company and I like their narrative. I am investing in precious metals through them, though I am not invested in them. If you click through any of the BullionStar links through me, I will get a tiny tiny fraction of commission if you purchase anything. Being referred through me will not increase any of your transaction costs, since BullionStar is rewarding me from their own pockets. So, feel free to show me some love if you plan to invest in physical precious metals, and click through me!


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