Ep 66: 3 Gold Realities you MUST know before investing!

3 Gold Realities you MUST know before investing!

Gold is touted as this safe heaven investment. And for a very long time, it has been a subject of contention across the financial markets. Bulls and Bears battle it out! Even Warren Buffett has entered the space! But does he actually own GOLD? In today’s episode, we will explore: Did Buffett actually break his investment thesis and buy Gold?Are all forms of “Gold Investment” the same? Should there be Gold in our portfolio? Is there real value in Gold today?What is the underlying narrative when buying Gold? 

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podcast Transcript

Okay. It’s like, my goodness, gold is everywhere. Everyone is talking about gold. And I just want to give you some reference. I’m recording now sometime early October and gold, gold, gold is like everywhere; everyone is talking about it from the banks to the news. It’s like suddenly gold is a thing, huh? Aiyo.

But yeah, so I do own a little bit of gold, but it’s like a little bit. And I thought I should share with you some realities that you should know before putting your money in gold and it’s not all glitter and gold… 

Welcome back.

So good morning, everyone. I welcome you to another day with the Financial Coconut. In our podcast, we’ll be debunking financial myths, discovering best financial practices, and discussing financial strategies that fits our unique life–you get it–ultimately empowering us to create a life we love while managing our finances well.

And today we’re going to spend some time talking about some gold realities that you should know before investing or putting your money anywhere near this shiny precious metal.

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So, yes, by now you should know that, uh, I’m very kiasu. I always produce alone in an oven, so we always have a meter backlog so that I don’t need to feel like, “Oh, next week what’s content?!” You know, I don’t want to be in a rush. So we’re always producing in advance and yeah, we’re producing now in October, you should be hearing this in December, and shout out to Nat. He’s the one that kinda got me to do an episode about gold, right. Because he works in a bank–I won’t say which bank–and they’re trying to push gold, and he was like, “mmm, yeah…” so then there are a lot of other people, a lot of other news sites that I’m seeing, like, Bloomberg, CNN, you know, they’re having all these analysts come on and talk about gold. And my question is, is it too late? You know, it’s at an all time high and are you really going to buy it at this point in time? That is your call, it is for you to decide. I’m not here to give you any advice, but I do think that if you believe in asset allocation strategy, which Dalio talks about a lot, then he believes in having some sort of gold to balance the portfolio, right? 

So that is if you believe in that strategy, but if you believe in other strategies that focuses on growth, focuses on value, then you know, nobody really  talks about gold in this other camp. So what is important is you need to go back to understanding why are you investing? What is your central idea of investing? What is your theory? So if you’re subscribing to the whole, you know, robo-advisor strategy or you’re subscribing to the whole ETF strategy, or you’re subscribing to the stock picking  strategy, or asset allocation strategy. So yeah, depending on what you do and what you believe in, it affects how you see things, right?

So I’m not going to give you like a buy call or a sell call. What is important is if you choose to participate in gold, or if you choose to entertain this idea of acquiring some goal in your portfolio, I think there are some realities that you need to know before investing. Yeah, before we go into the first reality that you should know, I think one thing that is very, very common, you know, in this whole like content creation space at this point in time, it’s talking about how Warren Buffet bought gold, right? The reality is Buffett bought a gold mining company, Barrick Gold, not gold, okay. It’s very different, yeah? Warren has never bought gold–I say Warren macam my friend, right–but yes, Warren has never bought gold. Buffet has never bought gold and will probably never, ever buy gold because it challenges his investment philosophy. And we’ll talk about that later, but yes, if you think about it, he bought a gold mining company, right. And that company mines gold. In that sense, if you are by a company that mines something, that is selling an all time high, then it’s not too bad, right. That means your cost of production stays very much the same, the end product that you’re selling is higher, right. 

So I think you’ve got to clear that out. And we got to clear that up specifically, which brings me to my very, very first point: Not. All. Gold. Are. The. Same. My goodness. It’s like people went on Twitter and went crazy, like “Buffett bought gold! Buffett bought gold!” It’s like… [sigh] but yes, not all gold are the same. Generally they’re like, your paper gold, your physical goal. That is a general classification. Of course there are your gold mining companies, your gold ETFs, you know, and what have you, right. So there are a lot of finer classification that we will not go into all of them, but I think you need to recognize that they are not the same and a general access to most of us as retail investors will be owning a gold mining company or owning physical gold. That means you go to the bullion and you buy the gold or buy some sort of paper gold, whether it is through exchange, like GLD — that’s a ETF, a gold index. Or, you can, you know, buy through the banks, paper gold. So I’m going to talk a little bit about the different stuff. 

And the first thing is physical gold, right? So when you buy something physical, you actually hold the real thing, like very song, right? Like you buy the gold bar and then you down there, you know, just leave it there and it turns out to be a paperweight, but anyway, so whether is it bars, jewelry, coins, all of those, those are physical gold. And they usually treat at a plus minus 3-5% spot price. What does that mean? Spot price is a market agreeable price. So somewhere in London, there’s this like London gold exchange and yeah, people just kind of trade gold and there is a certain price that they transact at. So the transaction price that you buy now, at this very moment, is called the spot price. So, oil also has a spot price, commodities all have a spot price, and gold has a spot price also, right. And these days with the internet, you can just go to Google and search “gold spot price.” It will tell you what the price today at this moment in time. 

So when you buy physical gold, right, they tend to have a 3-5% difference from the spot price. That means if you buy, there will be a 5% premium. Let’s say we take 5%, there’ll be a 5% premium on top of the spot price, which means that if the spot price is at $1,000 an ounce, yeah, and you happily decided to go to Clarke Quay and go to the bullion and say, “Hey, I want to buy gold.” Chances are you need to pay 1,050 per ounce. Sometimes the prices are not very up to date lah. So there may be some price delay, but generally it’s within that scope. And then if you want to sell it, if the prices go up to 1,100, right, you think you meet 10%, but when you want to sell it, you’ll probably fetch 1050 because there’s a 5% deduction from the spot price. So understanding that there is a premium and a difference in the spot price will give you a better idea when you’re buying gold, because it means that if you buy the physical goal, the gold price needs to go up way above the original price that you bought or the original spot price to be able to then make some sort of profit lah

Some people just like to hold the physical and yeah, you get it. That’s how exchanges, that’s how bullions make money, right. You buy, they sell you at somewhere a little higher. They buy back a little lower, you know, it’s, it’s a simple  business. But yeah, so you need to know that when you buy physical gold, yes, you hold the thing, but you pay a premium. Essentially your profits are lesser and the price is very weird wan because sometimes the spot price has changed a lot, but when you go to the bullion and the prices may not have changed as much, right. Because it’s highly dependent on whether the bullion wants to buy back from you. So that is the difference, okay. And that is the uniqueness of physical gold.

And if you so happen to buy paper gold, paper gold usually transacts at a much smaller margin. Or in fact, some of them transact on spot price, right. And I buy paper gold; essentially paper gold is like an ETF, you know, that you can buy, right. So I use GLD. And, different people use different. You don’t need to follow me. So when I buy that, I’m actually only getting the exposure at a very high chance within the paper space, you know, you either get options or you get like a co-sharing kind of thing. A different kind of arrangement. It’s unique, it can be actually exchanged straighter, it can be a private transaction with the banks. It depends on what is the arrangement. So it’s very different, but the thing about paper gold is you don’t actually own the physical gold and there may be a chance that whatever you buy don’t actually have that amount of gold, but that is contentious and a different topic.

But what you need to understand is that when you buy paper gold, you don’t own the physical thing. And the transaction is a lot faster because there is an exchange to facilitate that. And of course the spread is lower. So let’s say gold prices go up by 5%. Chances are, you will make 4% or something, right. So it’s more elastic, more liquid. And I do like that. Of course, if you choose to follow Buffet and buy gold trading company, then you’ve got to go through the whole process of analyzing mining companies, understanding what’s their inputs and what is their outputs, and you know, understand the whole business.

And I’m not a big fan of mining companies. I don’t invest in them. So I cannot give you much insights, but what you need to understand is that not all gold are the same. Depending on what gold you buy, you need to spend time to go and learn, but the fundamentals of investing are the same, right? In terms of like low fees, you know, a reliable partner, reliable product, and, you know, historical returns does not tell you the future returns. All those basics that we always talk about, they hold, you just need to know that not all gold are the same.

And point number two is that gold actually does not have real value creation, okay. And this is what Buffett says. I also believe in that lah, right. 

One of the main reasons Buffett doesn’t buy gold. Or should I call him Warren? Okay but anyway, Buffett doesn’t buy gold because he feels that–okay not he feels that –because he believes that gold doesn’t generate any value, which I can agree. I understand. Because when you buy the gold, the gold just sit there lah. Not doing anything, right? But when you buy, let’s say you buy property, you can lease it out. It gets rental, you have cashflow, there is some sort of value generated. You own equity, right? The companies, they do business. They can generate profits. They generate dividend, there are some sort of value creation, some things are being created in that process. Or even if you buy bonds, at the end of the bond term, you get the kind of interest that was agreed upon. So all of these other tools are creating something in the process of weight, in the process of time, they are creating something. So there is value creation in all these common retail tools that you know, you and I, we all can get, but gold is the thing that, you know, you don’t know how the thing is priced, and you don’t know what it’s doing, you just buy it ’cause you know, uh, everybody say to buy it. Then you own it at a certain price. And you’re just sitting there and wait, and you don’t know what’s going to happen. It’s not going to be like going to create much lah, in essence, it’s not part of a supply chain, you know, it’s not like silver, copper, you know, plutonium, uranium, all those things. They have a certain kind of value creation in terms that they can become something else. Right. Gold can lah, become jewelry lah, but limited, limited value creation. Even jewelry, other than appreciation value, like visual appreciation shiok, you know, woo the girl kind of value, I don’t know what other value it really creates.

So the general consensus is gold has no value creation. And in that sense, when gold has no value creation, um, it really questions why you holding it lah? Right? So this is something that you really need to understand and you really need to accept. Which is why Buffett doesn’t own it but of course different investors are different. Dalio holds gold, right; a quarter of his portfolio is in gold, or so he says. If you go and study a breakdown, it fluctuates, but either way, depending on what you own, or depending on what is your investment strategy, it changes. So I personally believe in this, that gold has no real value. So that’s up to you to call.

Which brings me to point number three. Knowing that gold has no value, right? The very chance that you are buying gold, you are actually buying into a story. You are very likely buying into a narrative. Okay, let me explain. I’m sure if you’ve thought about buying gold, you already heard a lot of stories.

And generally there are few, you know, base narrative out there. One is that gold is a traditional storage of trust, right? Or because everybody owns gold because in the past it was used as a currency. So there is some sort of trust involved that during tough times, during messy times, complicated times, everybody will flock to gold, which looks like it is quite true in terms of recent price movements. But the idea is you are actually not buying that gold for the gold. You’re buying into the idea that, you know, the world is going crazy, so buy gold because gold is the central idea of safety and trust. And in any case, if a monetary system collapses, you can go to gold.

All right. So you actually buy into that story and gold is but a tool to help you buy into that story. So that is one of the main narratives. Of course, in today’s current market, different, different kinds of narratives, like inflation, right? Everybody’s talking about like, Oh, the Fed is printing a lot of money. MS is printing a lot of money. Everybody prints so much money is that going to cause inflation? That is a big question in itself. We can talk about it another time, because inflation has different texture also, you know, and different, different, … essentially currency printing is not as simple and we can talk about it at another time, okay. 

But understanding that when a lot of people look at central banks printing a lot of money, they are concerned that it will directly cause inflation down the road. So whenever they are concerned about inflation rates and a devaluation of money, that means… because more and more money out there then the money is worth less and less.

So then people will consider the idea of buying gold because they believe that gold has value preservation, right? So they believe that, you know, gold price will keep coming along, you know, because money becomes less and less valuable and somehow everybody will shift money to gold, okay, this one I don’t know. I really don’t  get it. But yeah. These are the general narrative  out there, right? And you need to recognize that a very high chance, if you buy into goal, you are subscribing to this narrative and I am subscribing to one of the narrative and the narrative that I’m subscribing to is that the world is going to go into a mess, not as in the world is collapsing, okay, humans are amazing; we will find a way out. But because it’s going through a messy time, there is a lot of uncertainty out there. People don’t trust the monetary system and there may be a transition in power in terms of, you know, from the US to China, or I don’t know… depends, okay. It’s very complex.

That’s why I feel that I will allocate a little bit of my portfolio to gold, right. It’s not because I’m certain that this thing will happen, but I’m just going on the idea of probability, right? Because every situation is probable, mostly how the pandemic became a thing. A lot of people didn’t expect it to happen, but it happened mah.

So every situation is probable. And in this case, when I buy gold, I’m just trying to hedge my probability lah. Which is why a lot of people talk about hedging when they’re buying gold. When they talk about like gold being an inverse to the stock market and all those kinds of things–all are buying into a narrative, they’re all buying into the story.

There is no real value in gold, right? There is like… the gold doesn’t generate shit lah, for lack of a better way to put it and everyone is buying into a story. So if you so happen to buy gold, you need to be very clear: what is the story you are buying into? 

And that is my view, right? Feel free to share your thoughts, come over to our community Telegram group to share your insights about gold if you so happen are very passionate about gold investing. 

So I’m going to sum up today about the three gold realities that you need to know before investing. Number one is not all gold are the same, okay. Truth be told, there are paper gold, physical gold, you know, and even Buffet buying gold… company, gold mining company. He is not directly buying into gold. So there are all sorts of different things. And you need to be very clear about why you’re buying into the different tools that you buy, right? So look at the nuances, understand the investment basics. Any question, feel free to come to the community Telegram group, show us a product and we can talk about it. 

Number two is that gold does not have real value creation, unlike property that you can rent out or equity, owning a business that has value generation in terms of making profits and doing some sort of business, right. Gold itself is really just sitting there and objectively they don’t create much value.

And number three is that when you buy gold, the chances are, you are really buying into a story. So you need to understand what story you are buying into? Is it the whole hedging story that it goes inverse with the stock market? Is it the whole, like, the world is going messy and you know, something is going to happen. You don’t know what ‘s going to happen, but because it’s going messy, so you want to find a safe haven to go into. Or is it like the whole “Fed is printing a lot of money and then inflation is going to push things up and gold will have the value preservation”? So either way, whatever you believe in, it is all a story.

So you need to know what story you are buying into, what you believe in, and yeah: allocate accordingly, okay. Please don’t go buy everything in gold, yeah? 

So I hope you learned something useful today and truly appreciate that you took time off to better your life with the Financial Coconut. Knowledge is that much more powerful, interesting when shared, debated, and discussed. I hope you would share what you’ve gained with people you love, and I want to hear from you. Give me some questions and help me along with building a community of financially savvy coconuts. I hope together we can fulfill a curious mind and a desire for clarity. Join our community Telegram group, reach out to us on Facebook and Instagram, sign up for our weekly newsletter–everything is in the description below. If you enjoyed the podcast and if you want to keep us growing and stay independent, do buy us a kopi at ko-fi.com. With that, have a great day ahead, stayed tuned next week, and always remember: personal finance can be chill, clear, and sustainable for all.

I hope you had fun and learned something about gold. I don’t think everybody needs to invest in gold, honestly, but yeah, it depends on your investment palette. And if so you decide that you want to put some money in gold and yeah, understand what you’re investing in. There are too many products, I cannot cover everything at once, but if you have some interesting products that you’re exploring, come over, just drop the product link and we can talk about it. So next week we’re going to spend some time to talk about insurance, right? And a very touchy topic and not everybody loves it. And in fact, I know people that really hate the idea of talking about insurance.

I’m not a pro, but I have some observations about how people look at insurance, how people buy insurance and how people perceive insurance, some of the insurance beliefs that really bothers me. We’re going to talk about some of those, right? It’s not always about the agent. A lot of times we have our own embedded beliefs and, uh, for lack of a better way to put it, some irresponsible people just prey on those beliefs. So, you know, I’m going to talk about that and I hope you learn something. We are going to talk about the different beliefs about insurance that a lot of people have that I think are a bit weird lah. So next week, we’re going to talk about that and I hope it helps you. See ya next week. Bye!

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