The major broadcast Channel News Asia interviewed Bunker Gold&Silver a few weeks ago to explain why in our current economic situation (Deflation + QE) Gold will outperform the market and what are the most effective ways to invest…
Channel News Asia: Why are gold prices so high? And is this a good time to get into gold, especially with fears about deteriorating US-China relations and so on?
Christophe Numa: In fact, gold price is not so high. If you compare the current market price, 1 200 usd/oz to the cost of gold production, which is around 800 to 1 000 usd/oz, you understand that the price is still low. And if we also compare to the amount of money printed by the federal reserves called M1, we talk about 3.7 billion in United States, gold should be at US$ 10,000.
Over the last 15 years, we noticed a slow steady trend of gold rising price with an acceleration since last year.
The main reason is that the cost of production went up because the price of oil went up (US$ 15 in 2000 to US$ 80 now), and the amount of gold ounces that we found is decreasing.
In addition, the geopolitical situation is also a trigger for gold investment, the trade war between United States and China, the purchase of oil by China in gold or the fact that central banks are rising their position on gold are also signals that it is time for investors to invest in gold.
So, based on these economic and geopolitical situations, we think that it’s a good time to invest.
CNA: What is the outlook for gold?
CN: Gold can crash from 20 to 30% at worst and can go 10 times higher if worldwide situation continues to deteriorate, so it is a very good insurance policy. We think that the global worldwide situation will continue to deteriorate because governments continue to print massive debts in Japan (237.50% to GDP), US (106.70% to GDP), Europe (72.7% to GDP), China (55.40% to GDP). Hence, for gold the outlook is very positive.
The well-known precious metal investors, Jim Rogers, said that before the current crisis is over, gold will be at US$ 10,000. We more than agree with him.
CNA: How does one invest in gold? What do we have to bear in mind?
CN: In an investment perspective, when you invest in gold, the first thing is to eliminate what is not recognized as an investment like gold jewels for instance. Jewels and some other gold products are not recognized as an investment on the gold market. The first clue is to know if you pay VAT on it or not. If you pay VAT on gold, for sure it’s not an investment product.
Thus, you should focus on gold bars or coins.
So, in general for both, coins and bars, the first things you have to check are these ones:
1)The Brand: Is the brand from the LBMA list? LBMA is the Authority for regulating the international gold/silver market. So first, is the brand (or the refinery) who produced the gold bullion or coin, on the LBMA list?
2) The Chain of Integrity: This is to prevent fake gold bars. LBMA launched a program called “chain of integrity”, describing of the steps the bar has to follow to guarantee its authenticity. If your bullion dealer does not respect this chain of integrity program, you should reconsider your purchase with this bullion dealer.
3) The Price (Spread): As an investor you look for the best investment, so the best price. For example, if the margin is more than 1% starting from a bar of 100g (around 5k sgd), you may better look away. And moreover, if it’s more than 3% for silver and 3% for platinum, you should look for a better price.
4)The last thing to check, is asking to your bullion dealer when you buy the gold bars or coins, at which price he will take back the bullion. If he takes back a bar that he sold to you lower than the international spot price, no need to deal with him.
CNA: Gold Bars vs Gold Coins?
CN: The logic is as follow: the smaller the product, the higher the premium above the spot price. The premium is the margin that the client pays above the spot price.
So, for a coin, the premium is much higher than a bullion.
For example, the premium for gold coins can vary from 9% to 60%. When a premium is above 1% for a bar, it’s already very expensive.
Usually people say that coins are more liquid to resell. In fact, it’s easier to resell it because the amount is smaller than a bar of gold. This was true when you had initially big gold bars of 1kg to 12kg. Now, the perfect ratio between cost of production and liquidity are the bars of 100g.
CNA: Why should we buy gold? Is it an effective hedge against inflation? Even investors like Warren Buffett are not fans of it.CN: Gold is a hedge: we can analyze the charts and see that in some period of the history, particularly during some crisis, the gold played the role of hedge and sometimes he did not.
Here is a well-known example explaining why gold is a hedge against inflation:
In the 1 900s, with 1oz of gold, you could buy a suit. 100 years later, with the same ounce, you still can purchase a suit. You cannot say the same for a US$ 100 bank note for instance.
Regarding Warren Buffet, he said in an interview that investing is better than holding gold, because gold does not bring you any interest. It does not work for you. A company brings you dividends, a house brings your monthly income. Gold does not. We understand that and we agree with him on the long term.
But Warren Buffet also said in the same interview that all assets have a period when they over-perform everything else. This is also true for gold. Gold is not the asset you should invest in all the time. It is the perfect asset when the economy is in deflation, and when the governments print massive amount of paper currency to get out of deflation. This is exactly what is happening right now.
Companies are totally overvalued; look at “WhatsApp” which has been sold for 19 billion $.
Bonds are totally overvalued; look at the very low interests’ rates compared to the risk default. Housing is overvalued; look at the rent compared to the wages; look at the length of the debt people contract.
All those assets have been over-performing in the previous cycle. They will crash in the next one and gold will largely out-perform. The next cycle, which has already begun, is deflationary. Because the governments are printing tons of currency and the currency will not keep the purchasing power. Only gold will. Yet, there is very little physical gold available, and when people will want it, there won’t be enough for everyone.
CNA: I understand that there are three kinds of gold – Physical, Paper and Digital. What are the advantages and disadvantages of each type?
CN: Common beliefs argue that paper gold is more liquid, simpler to trade or cheaper than physical gold.
In fact, this is not true. There is a very liquid regulated and easy to trade market for physical gold: LBMA. Then, the price for physical gold is cheaper than paper gold.
The best example is at Bunker Gold&Silver, our investor pays 0.5% above the spot price when the average price for an ETF is 0.6%.
The only advantage of paper gold in comparison with physical gold is the leverage. Meaning that you can duplicate your profit by a small initial investment, but it’s also means that you can lose more. So in fact, it can be dangerous.
Regarding Digital Gold, which is basically crypto currency, for me, the historical track record of crypto currency is non-existent to give some feedbacks.
CNA: Taxes – Only on physical gold? How safe is it to buy from overseas?
CN: You don’t have tax on certified physical gold in Singapore. Actually, Singapore is even the safest and cheapest place to get physical gold.
For example, in Switzerland (the best place for gold in Europe) the selling price is about 1, 2% when it’s 0.5% in Singapore and the storage is about 1.25% of the value of the gold when it’s about 0.3% in Asia.
Why the gold is cheaper in Asia? Because historically, people used to buy gold in banks (like credit Suisse for example) and the banks would add some fees on top of refineries prices.
So, investing in physical gold in Singapore out of the banking system it’s a very smart investment move.