In my last article on gold on 4 December 2021, I made the argument that gold price was set for a big fall in 2022 due to the possibility of US interest rate hike. I also highlighted that a drop in gold price would represent good buying opportunities for bullion investors. Indeed, gold price had a major decline in 2022, falling from US$2,040 per troy ounce on 8 March 2022 to a low of US$1,628 per troy ounce on 3 November 2022.
Admittedly, I had not practised what I had preached as I had not bought bullion when gold price collapsed in 2022 (my funds were tied up in the purchase of a new home). Nonetheless, I was shocked that Monetary Authority of Singapore (MAS) had done so in late 2022.
According to the MAS website on International Reserves and Foreign Currency Liquidity, the volume of gold held in our national reserves in December 2022 was 4.94 million troy ounces. As at January 2023, the volume of gold held surged to 6.38 million troy ounces. Thus, the increase in gold held in Singapore reserves represented about 30%. This means that within the span of just a month, MAS had increased gold bullion by a significant quantum. More remarkably is that the MAS had bought at the levels between US$1,700 to US$1,800 per troy ounce. At current gold price of US$1,928 per troy ounce, the central bank must be laughing all the way to the bank.
Generally speaking, the MAS is very discreet when it comes to gold buying as it does not make any public announcements over the years. As such, the average gold prices at which the MAS had entered could not be determined. Even though I doubt that the regulator had bought at the lowest prices, the fact that gold price had rocketed after the MAS’ buying vindicated that the purchases were very, very shrewd.
Given that this is the first gold purchase since June 2021, it is evident that Singapore government is not a big fan of bullion. Unlike retail investors, central governments bought bullion as a means to diversify reserves. For Singapore government, this is no exception. Question now is what could have prompted Singapore government to buy gold and if this is the perfect time for retail investors to buy gold?
Gold price to surge with banking turmoil?
Singapore government’s gold buying spree coincided with the implosion of cryptocurrency exchange, FTX, in November 2022. In that saga, Temasek Holdings, the state investment arm, had to write-off a devastating US$275 million investment. Incidentally, gold price had begun to bottom during that period as well.
And then in 2023, the series of interest rate hikes by US Federal Reserves had started to take its toll on the banking sector. Within the span of just one week, three large US banks had failed – Silicon Valley Bank, Silvergate and Signature Bank. The collapses ignited global fear of contagion in the financial sector, leading to another massive financial crisis not seen since 2008.
In particular, the overnight disappearance of Silicon Valley Bank had not only sparked off a global shockwave, but also sent numerous tech companies in US into a tailspin as many of them had deposited funds in the bank. Amid the turmoil in the banking sector, gold price surged from US$1,809 per troy ounce to almost US$2,000 per troy ounce within two weeks.
Over in Europe, cracks in the banking sector started to appear with the forced marriage between UBS and Credit Suisse, which has been dogged by scandals for several years. Although the merger between the two Swiss banks had managed to avert a financial crisis from imploding in Europe, Credit Suisse’s Additional Tier 1 (AT1) bonds’ value (US$17 billion) were completely wiped out while shareholders of Credit Suisse could still get back some monies. This angered AT1 bondholders, who threatened to sue the Swiss governments. The move by the Swiss bank also upended the traditional principle of corporate bonds, which are supposed to be ranked senior over equities.
Ironically, AT1 bonds was created in the aftermath of Great Financial Crisis in 2009 to provide capital buffers and financial flexibility for global banks. It is the lowest tier securities and supposedly ranks only above stocks in the event of corporate failures.Flight to safety
With the uncertainty in the banking sector, there is a strong possibility that gold price will cross the pivotal US$2,000 per troy ounce resistance level to smash a record US$3,000 per troy ounce. This is not an impossible scenario as the emergence of the pandemic in 2020 led to gold price surging to a high of US$2,040 per troy ounce 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.
The series of interest rate hikes in 2022 to early 2023 had caused gold price to plummet to a low of US$1,620 per troy ounce in November 2022. However, with the banking crisis unfolding, the Fed had signalled a pause in the interest rate hikes.
In my view, it is too early to claim that the global banking crisis is over as Deutsche Bank shares plunged recently following a surge in credit default swaps. Let’s face it. Unless one works in the investment banking industry, most retail investors will never know what’s going on behind the scene. In fact, the bushfire could be raging right now. Question now is: how many more banks would blow up like Silicon Valley Bank and Silvergate? The collapse of Credit Suisse and the ongoing crisis of confidence of Deutsche Bank could be just the beginning of another massive financial crisis. Henceforth, in my opinion, there is a strong possibility that the Fed would start to trim interest rates in the latter half of the year.
Will Singapore banks be affected like what it happened in 2008? I doubt so because the financial contagion in 2008 was driven by subprime mortgage. Furthermore, the three Singapore banks are so well-capitalized nowadays and most of their loans are in housing and construction loans. In this regard, the money of bank depositors should be safe in my view.
Buying gold in Singapore
Will there be another Great Financial Crisis in 2023? Nobody knows for sure. Back in 2008, the Great Financial Crisis saw gold price soaring from US$900 per troy ounce in 2008 to US1,800 per troy ounce in 2011. Those who had bought gold in 2008 and sold off their holdings in 2011 would be laughing all the way to the bank. As such, a potential banking crisis in 2023 could represent a buying opportunity for gold buyers.
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.
Given the uncertainties in the banking sector, 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. Till then, enjoy the ride.