On 30 November 2021, The Straits Times reported that Singapore government bought gold bullion to add to the national reserves for the first time in 20 years. According to data extracted from Monetary Authority of Singapore’s (MAS) International Reserves and Foreign Currency Liquidity reports, the value of gold reserves held Singapore in April 2021 amounted to US$211.7 million and (4.096 million troy ounces). But by June 2021, the amount of gold reserves surged to a staggering US$1.8 billion. Interestingly, the Singapore government bought bullion when gold price has bottomed.
Given that this is the first increase in gold reserve for the first time in decades, it is evident that Singapore government is not a big fan of bullion. Nonetheless, I would say the purchases were shrewd as they were bought after gold price bottomed out in April 2021. Unlike retail investors, central governments bought bullion as a means to diversify reserves. For Singapore government, this is no exception.
Our official reserve assets amounted to US$385 billion in April 2021. However, the reserve soared to US$416 billion as of September 2021. The foreign currency reserves amounted to US$407 billion as of September 2021. As the foreign currency is in US dollar, it makes sense to me that Singapore government bought bullion to diversify the risk against the depreciation of US dollar.
Due to the devastating economy harm caused by COVID-19 pandemic, the US Federal Reserves had resorted to quantitative easing since March 2020 in a bid to prevent its economy from collapsing. This approach is similar to the one it had undertaken during the Global Financial Crisis (GFC) in 2009. Broadly speaking, this means that the US government is increasing money supply, thereby debasing its fiat currency. A decade ago, the quantitative easing had caused the value of US dollar to plummet till August 2011. The move by Singapore government to buy bullion could be a strategy to hedge against another meltdown of US dollar in the next few years.
Gold price to fall in 2022?
Is this the right time to buy gold? In my opinion, gold price is set for a big fall in 2022 as US Federal Reserves is widely expected to raise interest rates. In the aftermath of the GFC, the Federal Reserves had hiked interest rates a few times from 2015 to 2017. The interest rate hikes caused gold price to tumble from a high of US$1750 per troy ounce in October 2011 to a low of US$1060 in December 2015. Between 2015 to 2019, gold price was basically languishing between US$1200 to US$1300 per troy ounce.
The emergence of the pandemic in 2020 led to gold price surging to a high of US$2040 in August 2020. Gold price was in buoyant form in 2020 because the precious metal is viewed as a safe haven in times of uncertainties.
However, the loose monetary policies implemented by various countries led to International Monetary Fund to project headline inflation to “peak in the final months of 2021”. This led US policymakers to look into increasing interest rates in the coming months. In Singapore, DBS management forecast that the bulk of the interest rate hikes should occur in 2022. And typically, increase in interest rates led to a drop in gold price. For physical gold buyers, the decline in gold price would represent a good chance to buy bullion at cheaper rates.
Interestingly, billionaire investor Warren Buffett purportedly bought shares of Canadian gold mine, Barrick Gold Corporation in August 2020. However, it was reported that Warren Buffett subsequently sold off the stakes in early 2021. Given that the shares were bought when gold price hit record level and then sold when gold price dived, I suspect there might be some losses incurred.
Due to the volatility of gold price, owning paper gold can be riskier as compared to owning physical gold. Bullion carries inherent value and is free of counterparty risk. In this regard, it may be prudent for wealth builders to diversify their portfolio with physical gold.
Negative interest rates
The biggest criticism by naysayers of gold is that the yellow metal does not yield any dividends or interests. To this end, I do not disagree. But look at what happened to the stock market and bank savings rates at the moment. In the aftermath of the pandemic crisis, many blue-chip companies had slashed their dividends while the fiasco of Eagle Hospitality Trust vindicated that S-REITs will not be immune to financial crises.
On the other hand, holding more cash may cause more harm than good to wealth builders as savings rates plummeted to record lows following moves by US Federal Reserves to slash interest rates to near zero. At such levels, depositors are facing real negative interest rates when inflation is factored in. So the opportunity cost of holding cash is high.
As a matter of fact, European countries like Switzerland, Denmark and Sweden had implemented negative interest rates (NIRP) for the last few years. This is the case for Japan as well. In these countries, the banks have to pay interests to their central banks for the reserves they hold. In turn, they are faced with the choice of passing the cost to depositors by charging them fees.
In reality, very rare do banks charge savers for placing deposits with them. Rather, most banks in NIRP environment typically reduce benefits for savers to abysmal levels. Over in Singapore, I doubt the MAS will implement negative interest rates as the monetary policy framework in Singapore is based on a trade-weighting basket of currencies.
Against the backdrop of low saving rates, hoarding cash may not be ideal. But I think one should still set aside at least six months of household expenses in the bank. With retrenchments on the rise in Singapore, you never know if you may get the axe (unless you work in the civil service). If you lose your job at this juncture, it may be difficult to secure a new job soon.
The golden rule is always to invest in money in which you can afford to lose. At this point, I think it is important to adopt a more defensive investment approach but also set aside some funds to grab opportunities of upside. So after setting aside the emergency fund, one of the most viable investment options that could generate decent returns are probably gold.
One way to build wealth with gold is buying gold bullion. If you are buying physical gold, make sure to buy from a reputable bullion dealer. In Singapore, two of the most bullion dealers are BullionStar and UOB. The main advantage of BullionStar’s (BSP) is the opportunity to convert your gold savings to physical bullion bars, produced by LBMA refineries, at any time without any extra cost whatsoever. On the other hand, UOB gold savings account cannot be converted to physical gold or gold certificates. The UOB gold savings account is also not backed by physical gold.
Under the current ultra-low interest rate environment, it may be worthwhile to consider buying gold if you have set aside sufficient emergency funds. While stock market may offer higher returns and dividends in the long-run, it is prudent to have a balanced portfolio. As a safe haven, gold will help to hedge against market uncertainties and mitigate the risk of inflation.
With US printing money around the clock, inflation will likely to increase. Geo-political tensions will continue to mount, causing much uncertainties in global economy’s recovery. I view the current correction of gold price as healthy and a good opportunity for wealth builders to accumulate gold. Till then, enjoy the ride.