Gold Investments in Malaysia

 

Gold Gold Gold... its glitter has captivated the greed of men and women alike. And because of that, many has fallen victims to con-men and con-jobs.

Don't get me wrong. I do advocate investing in gold, just as much as you should save up. But it is not about the gold, it is more about how and where should you invest.

1. Safety first!
A lot of people ask me where to invest in gold and I always say to them that I only deal with the banks that sells gold savings account. Why? Because I think banks are safer than other non-regulated company or institutions.

So, where can you get gold / gold savings?
i) Bank Negara Malaysia : they have gold bullion / emas kijang. Click here to get more info from BNM.
ii) Local and Foreign banks (click on the banks to get more info): Maybank, CIMB and Kuwait Finance House

Is the deposits/ investment in Gold guaranteed by the banks? NO! But you would expect that they should manage the risk and liquidity better since they need to comply with the regulations, Bank Negara's audit and internal risk management. 

2. Liquidity
This is an extension of safety above. Liquidity means that you can sell and get your money back based on the market price of the gold. Again this is why I would always prefer the banks compared to other non-banks gold scheme. If there is a run on the sale of gold, you must be sure that the person you are selling to have the cash to buy back the gold. Since there is no regulated exchange for the gold, the only buyer of any gold that you buy would be the original seller/counter-party. Therefore, the creditworthiness of the original seller /counterparty is paramount to the buyer.If the counter-party cannot honor the sale of your gold back to them, you are screwed.

Granted, if the counter party gives you physical gold for your purchase, you could technically go to a goldsmith and sell the gold. However, there will transaction cost and discounts that the goldsmith might impose, eating into your profit.

In this case, the counter-party for all bank-issued gold savings would be the banks itself and the chances of the bank going into default should be a lot less than an non-financial company. The counter-party for Emas Kijang BNM is Bank Negara Malaysia itself and if BNM default, then we are completely screwed - we would have a much bigger issue to deal with than the gold itself.

3. Spread
Gold is a volatile assets and have no cashflow like dividend or interest. Therefore in order to make money on gold is to trade it. Buy low and sell at a higher price, hopefully.

However, as I mentioned above, there in no retail exchange for gold therefore the counterparty is the 'exchange' and whatever price they publish would be the buying and selling price - no haggling. These counterparty makes their money by the spread, the difference between the buying and selling price. Therefore, a smaller spread means the cost of buying and selling your gold is cheaper.

As at 3 pm on 17.09.13
Maybank : Buy (134.70 per gram) and Sell (140.56 per gram), Spread (RM5.86 or 4.4%)
CIMB: Buy (134.80 per gram) and Sell (140.40 per gram), Spread (RM5.60 or 4.2%)
KFH: Buy (133.54 per gram) and Sell (142.82 per gram), Spread (RM9.28 or 6.9%)

Of course this spread is at the discretion of the banks so it might go up and down; hence you must monitor your target to see the average spread over time.

4. Tracking international gold prices
Gold has no cashflow. It is a pure asset as good as a currency that does not belong to any country.  The price of gold goes up and down depending on the market forces. And since gold is quoted in USD, the price of gold in Malaysia is also dependent on the exchange rate between RM and USD.

And since gold investing is the ultimate passive investment, it should behave like an ETF, where the quality of an investment scheme depends on how well does the price (quoted by the banks) reflect the movement of the international gold price. The best one would need to have a very low daily tracking error, meaning if the combination of gold and exchange rate changes by 2% for a particular day, the price of gold quoted by the banks should change by 2% or very very close to that, up or down. This is called a tracking error, something the banks are not providing to us yet. We just assume that they are being good boys and girls; giving us the true reflection of gold prices, which they might be doing already.

So there you have it. Some basic tools to consider before you think about buying that nugget.Remember, this is NOT A RECOMMENDATION TO INVEST, BUY OR SELL GOLD. Go ask your financial adviser for that. I am just sharing knowledge.

Salam :-)