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This article first appeared in Personal Wealth, The Edge Malaysia Weekly on September 14, 2020 - September 20, 2020

Although gold prices have been rallying over the past few months, there are still buying opportunities for investors who aim to hold the precious metal for the long term. One way they can do so is by purchasing physical gold such as bullion, say industry players.

Liew Kim Fung, chief trader at Ace Capital Growth Sdn Bhd, believes gold prices will face selling pressure in the near term, but will continue to climb towards the end of the year.

“When the price of gold reaches its peak, there will be opportunistic sellers who previously bought gold at low prices looking to take profit. That is why you can see the [market sentiment turning negative recently],” says Liew.

Dean Arif, founder of Malaysia Bullion Trade, a precious metal bullion trading company that has been operating for 10 years, says gold might be oversold in the short term, and there will be multiple corrections over time. However, he believes prices will rebound, driven mainly by global central banks’ quantitative easing policies and fiscal stimulus.

Testing the authenticity of a gold bullion using a precious metal verifier

“Looking at the country’s fiscal policy and what governments all over the world are doing, the price of gold will continue to go up. When you have more [fiat money] entering the market [as a result of quantitative easing programmes], the purchasing power of fiat money gets diluted. This would then prop up the price of gold,” he explains.

Retail investors who want to take advantage of the opportunities in the precious metal can consider a range of options. They can be divided into two categories — physical gold and paper gold. Paper gold includes gold-backed exchange-traded funds (ETFs), gold investment accounts (GIAs), gold mining stocks and gold futures. Physical gold includes bullion and jewellery.

Dean says physical gold is still the primary way to gain exposure to the gold market in Malaysia, as there is a vibrant secondary market for gold bullion.

“The trading volume [for physical gold] is quite high actually. Based on my personal observation, I would estimate that physical gold makes up more than half of the gold trading volume in Malaysia,” he adds.

Physical gold is popular in Malaysia because it has a social value; it can be gifted during weddings, festive seasons or special occasions, according to Dean. It also functions as an heirloom, which paper gold finds hard to emulate.

Despite the growing number of investment options and new market entrants within the paper gold space in recent years, experts believe physical gold has several key advantages over its paper counterpart, and still has an important role to play in an investor’s portfolio.

Dean says investing in physical gold carries less counterparty risk than investing in paper gold. He explains that when buying physical gold, the investor is solely responsible for the safety and management of the gold itself.

“If you buy paper gold or set up a GIA, there is still counterparty risk because you do not have the gold in your physical possession. If the bank closes shop, or the futures market cannot deliver the actual gold, the system collapses, and you are left with nothing but paper. In fact, if you want to sell off your position in paper gold, they do not pay you in gold, but mostly have it cash-settled.”

Dean also points out that there is no management fee for physical gold products, unlike paper gold products. Although physical gold does come with a premium because of the workmanship cost, he explains that paper gold products such as gold-backed securities still cost more than the price of spot gold because these securities are backed by industrial gold bars, which also come with a premium, albeit lower.

If the retail investor were to redeem the physical gold backed by these securities, the gold has to be delivered to the investor, who has to pay a delivery fee and making charges. Dean believes investors could end up paying the same amount of fees if they were to buy bullion directly from a trader, depending on its making charges, weight and size.

Some digital gold investment platforms charge an annual management fee based on grammage of gold invested. GIAs typically charge a conversion fee and stamp duty fee per transaction, while gold-backed ETFs charge an annual management fee based on the US dollar.

“Investors usually get a shock when they find out that there is a 1% or 2% annual management fee. So, if you were to buy 100g of paper gold in January, by the end of the year, your gold would have become 98g. Two grammes are taken out as management and storage fee. Some people are okay with that, but some people would rather not pay the fee and instead store the gold themselves,” Dean says.

Datuk Steven Siow Dek Kuen, president of the Federation of Goldsmiths and Jewellers Associations of Malaysia (FGJAM), argues that it is easier to liquidate gold bullion than paper gold products such as GIAs.

“Physical gold investment is all about a willing buyer and a willing seller. You can trade [bullion] in any country, with anyone, whether a trader or retailer. When investors make investments in gold bullion, there is a mutual agreement between both parties, based on the percentage in price reduction when you want to trade in the gold,” says Steven.

“Whereas if you buy paper gold from a bank, you can only sell to the same bank. Banks also have shorter working hours [than retailers] and require you to fill out paperwork. That is why many people prefer buying gold at a retail shop.”

Steven also points out that despite the rise in new paper gold products, the market size and investor base for gold bullion have mostly not been affected.

“These new digital gold investments have expanded the size of the gold market as a whole, with more players entering the market. These new digital gold products are more for younger people and tech-savvy customers. But for the traditional buying and selling of physical gold bullion, the buyers are generally much more mature customers, and I don’t think this trend will go away. [Trading in physical gold] will not be replaced by [that in] digital gold.”

Investing in gold bullion, however,  does have its downsides. Liew of Ace Capital Growth highlights that gold is not a productive asset and does not generate returns, unlike businesses.

“If you have capital of RM200,000, for example, would you buy a gold bar and keep it for five years and wait for its value to go up? If it doesn’t go up, do you have the time and patience to wait [some more]?” asks Liew.

Despite the rapid increase in the price of gold, most experts agree that gold bullion functions more as a store of wealth and a wealth preservation tool as opposed to an investment tool. Steven often tells his customers that they should not buy gold looking to earn a profit, but instead with the objective of not losing wealth due to the depreciation of fiat currency.

Investing in bullion

Ermin Siow Der Ming, executive director of Poh Kong Jewellers Sdn Bhd, explains that there has been a surge in demand for gold bullion in recent weeks due to the spike in the price of gold.

“The market is very interesting. The higher the price of gold, the more people will buy gold bullion. In the 1990s, when the price of gold was only about RM300 an ounce, nobody bothered acquiring it. But now that it is almost RM2,000 an ounce, everybody is suddenly interested in it,” he says.

Ermin points out that gold bullion buyers can be divided into two core groups — wealthy investors who buy gold bullion in 500g or 1kg denominations, and average investors who buy small amounts of gold at regular intervals.

“The smaller the bullion, the more expensive the premium on the unit price. That is why big investors go for the 1kg gold bar, or kilobar. Actually, the kilobar is considered industrial-grade raw material if it is accredited by the London Bullion Market Association (LBMA),” he adds.

LBMA is the standard-setting body for the global wholesale market for precious metals, with over 150 members based in more than 30 countries. Bullion minted from mints certified by LBMA adhere to a strict standard of purity, form and provenance.

Gold bullion comes in all sorts of shapes and sizes, as well as different weight denominations. Bullion is commonly minted as a coin or bar. Some bullion coins, such as the American Eagle and the Chinese Panda, are even recognised as legal tender and have numismatic value, and are sought after by bullion collectors.

From his personal experience, Dean says bullion collectors are generally also bullion investors, but bullion investors may not necessarily be bullion collectors.

“Bullion collectors enjoy looking for different types of design and brands while preserving their wealth. They don’t mind paying a higher premium for the perceived rarity and beautiful design. Typically, they are between 38 and 55 years of age and in the T5 income bracket,” he says.

“Bullion investors just want to preserve their hard-earned wealth in bullion and cash out when the price is higher or switch to another asset class when the cycle turns.”

Dean further explains that sovereign coins minted by the US Mint, Royal Canadian Mint, Perth Mint and other government-backed mints are highly sought after by bullion collectors.

He says these coins have a relatively nicer finish and are produced in limited quantities. Coins with a “first strike” designation are highly sought after by collectors. “First strike” is a term given to coins packaged for shipment from the sovereign mint within the first month of their official release date.

“Sovereign coins typically sell at 20% to 30% more than regular minted coins. Some of the sovereign coins are also graded and sealed in a tamper-proof slab by reputable international coin grading companies such as Numismatic Guaranty Corporation (NGC) or Professional Coin Grading Services (PCGS) and will carry a 5% to 20% higher premium. The perceived rarity and reputation of the mint or grading agency also command this higher premium,” Dean adds.

The Malaysian Kijang Emas is the official gold bullion coin of Malaysia. First issued on July 17, 2001 and minted by the Royal Mint of Malaysia, it is available for purchase in over 30 Maybank branches.

Demand for locally minted bullion is still high, according to Dean. Bullion specially minted for special occasions such as Merdeka Day, Chinese New Year and Hari Raya is also highly sought after.

“Just like cars, some people like local cars while others prefer imported ones. I see that there is still a lot of demand for locally minted bullion, and the Kijang Emas was recently mostly out of stock owing to high demand,” Dean notes.

However, if an investor plans on selling physical gold to bullion traders or retailers, the appearance of the gold itself does little to add value to the gold, says Pang Ann Puo, honorary secretary of FGJAM.

“It is the fineness of the gold that determines its value, regardless of whether it’s from Canada, Australia or South Africa. Of course, some coins are collectable items, which will affect their value. But for us retailers, we normally buy the gold before scrapping and refining it. So, it does not matter how it looks or where it comes from,” says Pang.

“For jewellery, 18-carat white gold means that it contains 75% of pure gold. If you have the same white gold on hand but it is only 9-carat, it has 37.5% of pure gold content. So obviously, there will be a 100% difference in price.”

Dean advises investors to always buy 9999 gold, or gold with 99.99% purity, as opposed to gold with a lower purity or fineness. This is because 9999 gold is the industrial manufacturing standard and considered ­investment-grade.

He adds that retail investors can find 9999 purity gold bullion at most high-street gold jewellery retail stores, which are sold at ­FGJAM’s recommended price. Investors can also look at purchasing bullion from bullion traders online, which may not follow FGJAM’s recommended pricing.

Dean points out there are two types of gold bars: cast and minted bars. Cast bars have a low premium, and are just molten gold poured into a cast, with a logo stamped on them. There is not much workmanship, which is why the premium is very low.

“The Lady Fortuna minted bar, for example, goes through a milling process, rolling process, casting, mould design, packaging and so on. Minted bars have nice designs, but they cost RM200 more than cast bars,” says Dean.

He explains that for long-term savings and wealth preservation, investors are not required to invest in bullion that have fancy designs or are brand new. Investors can also consider purchasing circulated gold bullion from the secondary market, which have a relatively lower premium.

Scams and how to identify counterfeit gold

The number of gold investment rackets has decreased significantly after the Genneva Malaysia scheme came to light in 2012, according to Dean Arif, founder of Malaysia Bullion Trade. Following the raid by the authorities on Genneva Malaysia’s offices in October that year, three companies and eight individuals linked to the scam were charged in 2013. On Aug 4 this year, the High Court found these parties guilty of money laundering and illegal deposit taking.

“Because of the Genneva case, people are much more aware of these investment scams and are conducting more due diligence. They know that if they were to buy gold products but are paid dividends, they should ask where the money from the dividends is coming from,” says Dean.

“If you see that the company is selling gold in a closed loop manner — only among its members — it is a Ponzi scheme. They will sell gold to you at a highly inflated price, and then they give you regular returns derived from the highly inflated price. It’s just a matter of time before they deliberately collapse the system and siphon your money off. The gold might be real, but the scheme is a scam.”

Dean also notes that there has not been an increase in the number of counterfeit gold cases in the past few years. He says although scammers have got better at counterfeiting gold, precious metal testing equipment has also improved.

“A common modus operandi is to wrap gold foil [around a bullion made from] tungsten. Tungsten has a different conductivity from gold, so we use a testing device that works based on the conductivity of metal. If there is tungsten in the bullion, the readings will let us know that it is in there,” says Dean.

“The scammer might put copper [in the mix], because copper has the same conductivity as gold. But copper is not as dense as gold. If it’s the same size, the fake bullion will be lighter if you put it on a weighing scale. If it is the proper weight, the size will be too big.”

For retail investors looking to test the authenticity of gold bullion quickly, Dean says they can hold it in their hand to gauge its weight because gold is a very dense metal. Investors can also purchase a strong magnet and run it over the bullion to test whether it is genuine.

“Gold and silver are non-magnetic, even with tiny amounts of alloys mixed into it. So, if you run a high-strength magnet across the bullion and it does not stick to the bullion, it is more likely to be genuine,” says Dean.

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