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Gold! is it a good investment?

gold jewelryI’m sure most of us are rather clueless about buying gold other than hearing from our old folks that people should always buy pure gold rather than white gold or diamonds. The idea of buying gold would probably first pop up when someone or yourself is getting married.

So let’s first understand the type of gold commonly sold in Singapore.

Grade 999 – 99.9% pure gold content. Also commonly known as 24k Gold. Jewelry made of 999 gold is rather soft and gets out of shape pretty easily (jewelry has to be thick enough so that it wont go out of shape easily and of course the price is definitely much higher). Not suitable for daily wear.

Grade 916 – 91.6% pure gold content. Also commonly known as 22k Gold. Jewelry made of 916 gold is much more sturdier than 999 gold and is suitable for everyday wear.

White Gold – an alloy of gold and white metals with very little gold content. Very little gold value compared to 916/999. Jewelry made of white gold is much more sturdier than 916 gold.

When you walk into a jewelry shop,

Here are 2 fees which you should take note of other than the day’s gold price:

  1. Workmanship fee – A fee the jeweler charge for making the gold into the shape that you are looking at. The more complicated the design, the more expensive it is. (Different Jewelers charge differently and some may give a discount on it)
  2. Gold Melting fee – A fee the jeweler will charge you when you bring your own gold pieces to the jeweler to remake it into a new design. Jeweler will also charge Workmanship fee for the new design.

If you buy a piece of 999 gold jewelry weighing 15 grams and Workmanship fee is $200, the price you will be looking at:

Let’s say gold per gram is $68.

(15 grams * $68 + $200 Workmanship fee) + 7% GST = $1,305.40

A simple and thin 999 gold bracelet would weigh at about 10-20 grams.

Now, here is something jewelers will not tell you upfront unless you ask them: What happens if you want to sell the gold later on?

Most people would think of pawn shops when it comes to liquidating gold pieces. You can actually sell it back to any gold jeweler. Here’s the catch, most jewelers will only buy your gold at 70% value with current gold price. Pawn shops would usually buy in at 50%-70% of current gold price as they encourage you to borrow using gold as collateral.

Using the above 999 gold bracelet as example, and let’s say 999 gold price has increased to $90 per gram.

Your gold bracelet is now worth = 15 grams * $90 * 70% = $945

You made a loss of $360.40 (or 27.6%) although gold price has increased by $22 (32.35%).

If you have bought the gold and trade in for a new piece from the same jeweler, the jeweler will usually take trade in value at 90%, again, the catch is you have to buy gold from the jeweler again.

Let’s see what happens when the 999 gold price doubled to $136 per gram.

Your 15 grams gold bracelet is now worth = 15 grams * $136 = $2,040

if you sell it back to the jeweler at 70% value, its worth $1,428. Now we are looking at a nett gain of $122.60.

If 999 gold price hits $136 per gram

inROI per year
5 years0.018%
10 years0.0094%
15 years0.0063%

This type of ROI (Return on Investment) is consider really bad!

Is using gold as collateral to borrow from pawn shops a good idea?

Typical pawn shops will charge a 1% interest per month which is 12% per annum. They collect upfront interest every 6 months. If you pawned that same piece of gold bracelet, here’s what you will get.

Let’s say 999 gold price at $90 per gram and at 70% value, your 15 grams gold bracelet is worth $945. Upfront Interest for the next 6 months is $56.70. So you will only get $888.30 in cash. If you did not renew the interest after 6 months, your gold bracelet belongs to the pawn shop! The pawn shop melts the gold and resell at $90 per gram, the pawn shop earns $1,350 – $888.30 = $461.70 in just 6 months.

So you got a collateralize loan of $945 at 12% interest per annum. Is it a good deal?

If you look at any bank’s unsecured personal loan (no collateral) at 6%-8% per annum, isn’t it cheaper and easier to borrow than to pawn your gold piece? The banks’ requirement is only a monthly salary of at least $1500 and you can borrow a maximum of 4x-6x of your monthly salary. I’m sure you know now that which is a better way to borrow.

gold barBuying Gold from banks is a different story!

Lets take UOB Gold Savings account.

Looking at 16 May 2016 gold rates

Bank sells 1 gram of gold at $56.64 and buys 1 gram at $56.37 . The spread is only $0.27. If today, you buy 1 gram of gold and sells it back to the bank on the same day, you only lose 27 cents!

  • Note: bank spread is only indicative, it may not be the same spread, it could be higher of lower when you sell in the future.

Bank’s wholesale gold price is also lower than jeweler’s retail gold price. The good thing about this type of gold holding account, you can buy in grams rather than in kilos which most can’t afford to. Like your regular savings account, you can buy in gold whenever you have extra money. The downside of this is the account fees and charges.

For UOB Gold savings account, the monthly service fee is calculated on a monthly basis at 0.25% p.a. of the highest gold balance each month, subject to a monthly minimum charge of 0.12 grams of gold. Service fee is accumulated and charged at the end of the year.

If you have 100 grams of gold with UOB, your monthly service fee would be (100 grams * $56.37 * 0.25%/12) =$1.17 before GST. The bank will deduct this fee from your account in grams of gold at the end of each year.

In my opinion, buying gold from jewelers is not a good investment, its purely for cosmetic purposes only. It only serves as a last resort for emergency funds when your bank account has $0 in it.

If you want to invest in gold, banks gold savings account will be a much better choice!

Every type of investment has its risks, and Gold may not be the best commodity to invest. Like Warren Buffett, he prefers silver to gold because silver fits his usefulness requirement.

Its your own call to decide what to invest in, and again, the golden rule for any forms of investment is “NEVER NEVER borrow to invest!”

 

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