Making The Singaporean Case For Gold

Authored by: David Fergusson, Chief Executive Officer and Co-founder, Hugo

Gold is a curious metal: it is remarkably heavy, yet soft, extremely inert, but with a luster that is beguiling to almost everyone; which is why it remains the material of choice for jewelry. It is an equally curious investment, and there is no more a divisive subject amongst investing professionals than gold.

We live in a globalized world where economies are all interconnected. Thus, safeguarding our wealth from economic risks and market volatilities is essential. And for Singapore, a global trade hub maintaining the delicate balance of business and diplomacy with its more powerful economic partners more than demonstrates that investing in gold needs to be a serious consideration for every Singaporean’s personal finance.

Gold shines the brightest in times of inflation and uncertainty

The naysayers claim that gold does not yield. It is expensive to produce, it is of not much use for anything other than jewelry, and its price moves around a lot. They are correct.

The pro-gold lobbyists will point out that over time, the price of gold mirrors the cost of producing it, which tends to reflect inflation. It has been a form of money since mankind lived in grass huts: it has a semi-rigid supply, which means Central Bankers can’t debase it, and it is the highest power in money because it has no counterparty. Additionally, gold cannot be conjured out of thin air like the US Dollar, the British Pound sterling, the Singapore Dollar, or any other fiat currency. Gold holds its value over time regardless of what goes on around it. 

This is the paradox of gold. There may be no earthly reason to hold gold or for gold to be the one long-term constant in the millennia of innovation and fraud in finance! But it is. And that constant provides protection against all manners of risk and uncertainty. As such, investors ignore gold at their peril.

It is oft-argued that gold has seen its time, and it is time to move on. After all, the collapse of the Bretton Woods system – the abandonment of the gold standard – in 1971 led many people to believe it was time to retire the gold. Well, 50 years on, it’s still very much around. So why is it still relevant today?

The gold market is highly liquid

Well, the gold market is still one of the most liquid markets in the world, with roughly US$200bn traded on recognized exchanges, making it the 3^rd largest financial market. But that creates a misunderstanding that gold trades in informal markets in every small town in the world, via traditional jewelers (in India or Indonesia) or pawnbrokers in developed countries. This volume goes unrecorded but is undoubtedly huge. It also underpins an important feature: you need to be in a financial centre to trade securities, but gold can be traded from Toronto to Timbuktu to Temasek (old name of Singapore).

Gold effectively insures your investments against risks

Nowadays, Singaporean investors are bombarded with all sorts of investment instruments and products, most of these are global portfolios which are generally volatile and highly exposed. Thus, having gold in their portfolios can serve to dampen out the volatility. Not only is it liquid, but gold is also one of the rare asset classes that is non-correlated. This means that you can put it in your portfolio as insurance, and you can be comfortable that if the world around you blows up (or when your Bitcoin value tanks), your gold will provide you with safe-haven performance.

Gold can cushion your wealth in black swan events

Consider also a live scenario. The US dollar hegemony that we have witnessed since the end of WWII is increasingly bristling for China. Within Asia, trade is still conducted largely in US dollars. This made sense when Asia’s largest trading partner was the US, but less so now that China is the big kid on the block. So logically, it makes sense to switch intra-Asian trade into RMB.

Irrespective of the lip service paid to China, regional countries are delighted by the military presence in Asia that the US dollar hegemony brings. And no one trusts China or its currency (when compared to the US dollar). 

China, if it is anything, is strategically savvy. It is amply aware of the “reservations” other countries pay towards the world’s most populous country and its monetary system. A simple solution to redress the balance, vis-a-vis the US dollar, would be to introduce a gold-backing to the Chinese Yuan. This would have a massive, immediate and strategic impact on China’s position relative to the US and the dollar. Whether China’s astonishing production and purchase of gold over the past 15 years is a precursor to this type of strategic move is pure speculation. However, it does highlight the relevance of gold.

Where your gold is, therein lies your wealth

You may have heard of Central Bank digital currencies – this, perhaps more than anything, highlights the relevance of gold in the modern monetary system. Central Bank digital currencies are hailed by Central Bankers and their acolytes as a new wave of efficiency for managing currency. Even Singapore is now setting up its own digital currency.

For anyone with even a passing understanding of monetary mechanics, Central Bank digital currencies are, at best, a way of stealthily monetizing all the debt on Central Bank balance sheets – i.e., debauching the currency the same way as every other monetary reform has. At worst, they will enable governments to combine fiscal and monetary policy and target their larceny far more effectively. Either way, gold will offer you a safe harbor from the piracy

To hold 6,500 cryptocurrencies or hold a single gold?

It is fair to ask where the increased digitalization of the world leaves such a physical phenomenon. The take-up of Bitcoin and other forms of cryptocurrencies and their anointment by the punditry as “Digital Gold” has certainly had some impact on gold trading. After all, they are all the rage nowadays with 28 percent of young investors already in on it. Money that would ordinarily have headed into gold has headed into Bitcoin and other cryptos. And it is arguable that gold would be far higher today were it not for froth taken out of the market by Bitcoin et al.

But that does not affect its relevance. In fact, the proliferation of cryptocurrencies highlights the benefit of gold – you can invest thousands of unanchored cryptocurrencies but there is only one gold. When a currency, including cryptocurrencies, is unanchored, it means its value is not based on anything real or reliable. This is why a single tweet from Elon Musk sent Bitcoin on a nosedive, and why the Chinese ban on cryptocurrencies shook the crypto exchanges.

How Singaporeans can hold gold

The most obvious way to hold gold is via bars and coins, but these typically have relatively high premia (read costs) for purchasing the exposure. There are reasons why you do not find gold bars in most Singaporeans’ homes:

1. A small 1-kilogram gold bar is worth $76,000 at the time of writing. Keeping it around at home is nerve-wracking.

2. When you keep it in a vault, you pay vault fees.

3. Most people buy insurance to protect their gold.

They also have some inherent problems like forgery, theft, and a lack of easy liquidity. As such, they were superseded by various “paper” gold instruments, from ETFs to derivatives. While these are cheap and liquid, and accessible, they are not gold, but a facsimile. You own a claim on gold via a counterparty and not the underlying gold.