Wednesday 28 Feb 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 26, 2016 - January 1, 2017.


The most popular way of investing in gold remains the purchase of actual bars and coins. While there is an undoubted sense of satisfaction and security from the physical possession of the bar, the retail investor should keep in mind the premium over the prevailing gold spot price as there are associated costs to any investment in gold bars.

Premium over spot refers to the price of the gold bar offered by the seller compared with the market price of an equivalent amount of gold. The premium included in the price of the gold bar takes into consideration additional costs, including the cost of production, distribution and collectability/rarity value.

The costs of investment in gold bars are related to the different processes associated with production, handling, packaging, insurance and delivery. They are also affected by changes in demand or the availability of a specific bar size. Thus, for smaller bars, these associated costs typically make up a larger percentage of their underlying value.

That these costs diminish as the bars increase in size is a truism: the smaller the bar, the more expensive it is on a per gram basis compared with a bar of a larger size. On Oct 7, I took prices from eight different bullion dealers and banks in Malaysia for six different gold bars, from the one-gram bar to the 50g bar. The average premium over spot price for a one-gram bar was 34% over the prevailing spot price, with a maximum premium of 54%. As expected, the premium over spot becomes progressively lower for bigger bars.

Investors should try to buy bars at a price that is as close to the spot price as possible. When an investor sells his or her gold bar, most dealers will provide a buy-back price that will be at a discount to the spot price. If the spot price has not risen sufficiently to cover the original premium over spot, or even worse, if the spot price has dropped from when the investor first purchased the gold bar, the investor will sustain a loss on the investment. Consider the following example:

Person A purchases a 1g bar from Dealer B. Let us assume that he purchases the bar from a seller that charges a 34% premium over spot. Assuming that the spot price is RM180 per gram, he will pay: RM180 x 134% = RM241.20

Assuming that Dealer B will buy back all bars sold at a 2% discount to the spot price, the spot price will have to rise by 37% to RM246.12 (RM241.20 / 98%) before Person A can break even on his investment.

The premium that an investor pays over spot therefore can have a material impact on the return on any investment in gold bars. And since premium over spot for physical bars diminishes with larger bars, investors should opt to buy bigger bars whenever possible.

However, this then leads to the question of affordability as 50g and 100g bars are priced in excess of RM9,000 and RM17,000 respectively. Many investors, like my insurance agent who buys 100-gram gold bars from his local bullion dealer, regularly put money aside until they have saved enough for that 50g or 100g bar.

There is a more effective way that enables investors to keep premium over spot at an absolute minimum as well as to buy in low ringgit terms: purchasing gold from credible online bullion dealers who offer the retail investor the ability to buy gold on a fractional basis at a price that will be near spot. (See my column, All That Glitters, published on Sept 26, for tips on finding a good bullion dealer.)  

Another reason to consider gold purchasing on a fractional basis has to do with investment flexibility. Let’s say that my insurance agent wants to sell only a quarter of his 100g gold bar. He would have to sell the whole bar and then buy back 75g of gold made up of one 50g bar, one 20g bar and a 5g bar. Not only does he have to sell his entire 100g holding, but he then also has to pay the premiums associated with each of the three different bars he has to purchase.

With fractional gold purchasing, the retail investor can buy and sell gold for as little as RM1 at a time while enjoying spot prices. Thus, while a screen printout of your holdings of gold that are safely held in a vault might not be as impressive as having an actual bar of gold on display, it may very well be a much better way of enhancing the returns on your investment.

Robin Lee is founder and CEO of HelloGold. He was previously chief financial officer of the World Gold Council.

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