Is it a good time to buy Gold? – OCBC Precious Metals Account Review

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Gold is one of the hardest asset classes to understand.

From a low of US$1,175 in August 2018, gold soared 73% to US$2,036 in July 2020.

When all seemed well post-COVID, Gold then fell to as low as $1700 in 2021.

Recently, with the Ukraine war, soaring inflation, and possible recession risk – Gold broke the $2,000 level again.

Is gold a good portfolio diversifier?

Is it time to buy Gold?

Note: This post is sponsored by OCBC Bank. All views and opinions expressed in this post are from Financial Horse.

 

Bretton Woods and the role of Gold

To really understand gold, we need to go back to WWII.

Bretton Woods 1.0 – USD backed by Gold

It was the end of WWII, and the Allied forces had just defeated the Nazis.

They were discussing a new monetary order to rebuild the world.

There were 2 options:

  1. US System – USD is pegged to gold, and all other currencies are pegged to USD
  2. Keynes System – Creates a basket of commodities as a neutral asset, around which all other currencies are pegged to

As history would have it, the US system won, giving birth to the Bretton Woods system (where the meeting was held).

1970 – Problems start to appear

All was well for the next 25 years.

During this 25 years, the European and Japanese economies boomed.

They ran massive surpluses against the US economy, and accumulated truckloads of USD.

Now remember at this time, USD was backed by physical gold.

Which means that you can take your USD to the Federal Reserve and exchange it for physical gold.

Which everyone started doing.

By 1971, the US gold reserve drained from 21,000 tons to 8,000 tons.

And they figured this was not sustainable, because eventually the US would run out of physical gold.

There were 2 options:

  1. Devalue the USD versus gold – USD was $35 to gold at the time, this option would have devalued the US to $150 against gold
  2. Unpeg the dollar from gold – USD would no longer be backed by gold

Of course Option 2 is the better choice for the US, but it’s tricky because why would the rest of the world hold USD if it’s not backed by anything?

Bretton Woods 2.0 – USD backed by Oil

The next part is a bit murky.

Through a mix of brilliant geopolitics by the likes of Henry Kissinger, and one heck of an oil shock from the Arab Oil Embargo, the US went with Option 2.

And by the end of the 1970s – a new monetary order had emerged.

OPEC would only sell oil in USD.

The whole world needs oil, so they need to buy USD.

So the USD went from being backed by gold, to being backed by oil.

This was Bretton Woods 2.0.

Do you trust the Americans?

With Bretton Woods 2.0, you must understand that the world is essentially placing their faith in the US.

You must buy USD to buy oil.

And the USD monetary policy (and FX) is controlled by the Americans.

If the Americans decide to depreciate their currency, the whole world is in trouble because they run out of dollars to buy oil (or commodities).

The only way this system works long term, is if the Americans are responsible in how they manage their monetary policy.

Which they were, all the way until 2008.

2008 Lehman – Cracks start to emerge

In 2008, all hell broke loose.

The banking sector of the US nearly went insolvent.

Forced between going through a painful deleveraging exercise or printing money, the US chose the latter.

And they’ve been doing it ever since.

QE 1, QE 2, QE 3.

Where are we today?

Things kicked up a notch in March 2020, with QE infinity – the unlimited printing of USD. Every red line was crossed, even the buying of junk bonds by the Federal Reserve.

But the final straw as it seems, may have been February 2022.

When they effectively weaponised the USD to crush the Russian economy.

The moment they did that, every Central Bank around the world woke up overnight and realised one day, this could be them.

Sure if you’re the UK this is fine because the Americans are your best pals.

But what about China? Or India? Or Brazil?

Are you prepared to say that the US will never turn this weapon on you, no matter how bad things get?

After 40 years where most central banks hoard the USD instead of gold, suddenly everyone is looking very vulnerable:

Where does gold come in?

If you only take away one thing from this article, let it be this:

Gold is the ultimate neutral asset, that exists outside of paper currencies.

It is one of the few effective diversifiers against depreciation of paper money.

When things really go south, it is one of the few assets that will hold its value.

Gold is one of the few assets that does well in stagflation (or fiat devaluation)

Gold shines when paper money is losing its value, quickly.

In finance speak – it means that gold does well when real yields (inflation adjusted) are negative.

Think about it this way.

If inflation is raging at 5%. And the bank interest rate is 0%.

You’re effectively losing 5% on your paper money, every year.

That’s what negative real rates means.

It’s one of the most insidious form of wealth transfers, employed many times all throughout human history.

And gold as it turns out, usually performs well in such regimes. Especially so when economic growth is slowing.

In prior stagflation periods, Gold was one of the few asset classes to truly shine:

But FH… this is not the 1970s

Now I know many of you may point out that the last time we had real stagflation, it was the 1970s.

The world had just gone off the gold standard. People were biased towards gold as currency.

But this is now the 2020s.

Maybe gold no longer works like it used to. Maybe Bitcoin has replaced gold.

Maybe gold isn’t such a good investment anymore.

And I agree these are all valid concerns.

My view on gold?

My view is simple.

I don’t know exactly how the future will play out.

But I know that we are moving towards the later stages of Bretton Woods 2.0.

This system has worked well for the past 40 years, but just like Bretton Woods 1.0, it will eventually die.

We’re seeing early signs of this. China is looking to buy oil from the Saudis in RMB. Likewise with commodities from Russia.

India is considering buying oil from the Russians in Rupees.

Once you open the floodgates, it’s very hard to put the genie back in the bottle. Before you know it the Europeans want to pay for oil and gas in Euros.

At the same time, the US economy is running a massive deficit. Over the next 10 years, the boomers are going to retire, and the pension system, and healthcare system, is horribly underfunded.

With the lessons of 2008 and 2020, the solution for the US will be to print more money.

When exactly everything breaks I don’t know. But all the pressures are building up in the system, and things suddenly started accelerating after February 2022.

As the quote from Ernest Hemingway goes… “Gradually, then suddenly.”

Do I hold Gold?

Yes, I hold gold.

Physical gold bullion in fact, stored in a bank vault of my choosing.

Do I hold cryptocurrency?

Yes, as well.

I don’t know which asset class will benefit when the monetary system eventually breaks, so it makes sense to just hold a basket of alternative assets.

How to buy Gold?

That said, I don’t recommend physical gold for everyone.

Transaction fees are high for physical gold (1-2% transaction cost to buy/sell), you need to buy from a reputable dealer, and storage costs are very real (can’t just put it under your bed).

OCBC Precious Metals Account – Buy Gold and Silver on the OCBC App

OCBC launched their precious metals account in October 2021, and it logged more than $1 million in transaction volume the first week.

I actually played around with it myself, and it’s ridiculously easy to use.

As long as you have an OCBC bank account, you can literally be buying gold/silver on the app within 30 seconds – link here.

Features of OCBC Precious Metals Account

The key features of OCBC Precious Metals Account are:

  • Paper Gold
  • No sales charge or custody fee
  • Buy as small at 0.01 ounce or 0.31 grams (approximately 27 SGD for gold or 0.35 SGD for silver)

Paper Gold

This is paper gold, so it is not backed by physical gold or silver.

And accordingly there is no right to request for delivery of the physical bullion.

But the price exposure is exactly the same.

If gold goes up by $100, you will make the exact same $100.

Counterparty risk?

I’ve confirmed with OCBC, and the counterparty in this transaction is OCBC alone.

So the risk of you losing your paper gold, is only if OCBC goes bankrupt.

No sales charge or custody fee

The bright side of using paper gold, is that there is no sales charge or custody fee associated with buying the gold.

With ETF gold you’re usually looking at about a 0.4% expense ratio annually (excluding transaction costs), and this is significantly higher if you buy physical gold.

Paper gold saves on that.

Buy as small at 0.01 ounce or 0.31 grams

Because its paper gold, you can also buy as small as 0.01 ounce or 0.31 grams (27 SGD for gold or 0.35 SGD for silver).

That’s a very small investment amount, which could be attractive if you just want to get exposure to a small amount of gold, and don’t want the hassle of physical gold.

What is the spread?

OCBC Precious Metals Account does charge a spread though.

Based on my checks – OCBC quoted a S$2689 indicative price of gold, when the market rate was US$1963 per ounce (S$2679 using interbank USD FX rate).

This works out to an indicative spread of about 0.3% – 0.4% inclusive of FX fees.

The good thing is that this is one-off, there are no recurring charges each year.

So in fact the longer you hold it, the more attractive OCBC Precious Metals Account is from a costs point of view.

What are the alternative ways to hold gold?

The other options are:

  • ETF – 0.4% expense ratio for GLD, the largest gold ETF (excluding transaction fees)
  • Physical Gold – 1-2% transaction cost, excluding storage fees
  • Gold Miners (leveraged gold play) – 0.51% expense ratio for GDX, a gold miner ETF (excluding transaction fees)

Each has their own pros and cons.

Physical gold is gold you own, so there is the option of going to the vault and taking it out. But transaction costs and storage costs are very real, and you can only transact in predefined weights.

ETF gold to me is no different from paper gold, so you may be better off just saving yourself the fees and using OCBC Precious Metals Account.

Gold Miners are a form of leveraged gold play. So if Gold goes up 10%, the GDX (gold miner ETF) may go up 30%. Of course, this works against you when gold is going down too, so be careful.

My personal view on OCBC Precious Metals Account?

I know that the true gold bugs will say it’s physical gold or nothing.

The thinking is that in a true global monetary reset, paper gold could be worthless.

I mean I get that, but take it from someone who holds gold bullion – physical gold has a whole bunch of downsides too.

Transaction cost is very real, storage is a big issue, authenticity of gold is tricky, and if you own say a kilo bar you can’t just sell a quarter of it.

In fact my view if you want to own significant amounts of gold, best to adopt a hybrid approach.

Hold a portion of it in physical gold, and a portion in paper gold.

This gives you the benefit that comes with holding physical, and the ease of transaction that comes with holding paper.

It’s like the approach with cryptocurrency, where a portion is in cold storage, and a portion is in hot storage for easy transacting.

And if you’re looking at paper gold, OCBC Precious Metals Account is worth a look. Very easy to use, and transaction fees are acceptable. Risk you’re taking on is OCBC counterparty risk, so that should help you sleep at night.

How to open an OCBC Precious Metals Account?

The steps are really easy.

Click here.

And follow the steps below!

Note: This post is sponsored by OCBC Bank. All views and opinions expressed in this post are from Financial Horse.

 

13 COMMENTS

  1. Dear FH,

    Thanks for sharing. Much appreciated.

    You mention that “the risk of you losing your paper gold, is only if OCBC goes bankrupt”.

    In the event that OCBC goes bankrupt, when liquidator comes in to sell the bank asset to distrubute the sales proceed, where does folks who own such paper gold? Are they quite front in the line OR way at the back of the line to receive anything?

    Does DBS/UOB have a similar product?

    Thank you

    • That’s a good question. I actually don’t know the answer to this one. I would expect it to be the same status as an unsecured creditor (so ahead of shareholders) but frankly I could be wrong here.

      I would say the risk of OCBC going bankrupt is exceedingly low (but of course non-zero).

      No, no other bank or financial institution has a similar product to my knowledge. The only other way is to go into the open market and buy a gold futures contract – which is essentially what OCBC does for you here, but in a much more convenient way (and potentially cheaper and at smaller quantities). It’s a v unique product imo.

    • Silver is just a more leveraged version of gold. If gold is BTC, silver is an altcoin. More volatility, but also higher upside (or downside).

      But the broad macro trends for both tend to be the same.

      If gold does well, silver will probably do better. If gold does poorly, silver probably does worse.

    • HI Jannis,

      That’s quite a different fund though – offers broad exposure to metals mining. Whereas this is pure exposure to Gold price.

      So it depends on what you’re trying to go for.

  2. Hi FH, why did you comment that monetary reset = paper gold worthless? Is it because it’s not backed by physical gold?

    And if so, then the gold bugs would prefer GLD etf wouldn’t they, because the ETF does physically hold gold.

    • Well if you think about it, what happens in a monetary reset? Widespread turmoil and chaos across the global financial system, very little liquidity, counterparty risk etc. Think 2008, across asset classes.

      In such a scenario, you dont want to take on counterparty risk. Paper gold has that problem, because you won’t know if your counterparty is good for the money. In fact GLD has the same problem, because the bullion is stored in a London vault, which can be “nationalised” by the UK government.

      Now of course the risk of this is exceedingly small, but the whole point of gold is to hedge against a scenario like that right? So the problem with paper gold is that in the one scenario where you truly need gold, paper gold might not work.

      But of course, physical gold has its own drawbacks as well, which is why I suggested for those who are serious about holding gold, a hybrid approach may be worth considering.

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