How to Invest with Gold, with Robin Tsui and Freddy Lim

Episode summary

Robin Tsui, Vice President of State Street SPDR ETFs and APAC Gold Strategist, and Freddy Lim, Chief Investment Officer and Co-founder of StashAway discuss the importance of Gold in the financial world, what makes it unique, how to use it in a diversified portfolio, and why central banks are building up their Gold reserves.


Episode transcript

Philipp: Welcome back everyone for another episode of In Your Best Interest by StashAway. We have a super exciting topic today. We're going to be talking about Gold. This is a topic that many requested, many people are interested in, especially now in 2020, with global stock markets having some volatile times. Gold being seen, traditionally, as a safe haven becomes quite the interesting topic to talk about. And, I am super excited to have two guests on the show today that are very well-versed when it comes to Gold. On one hand, we have our Chief Investment Officer from StashAway, Freddy Lim, with us again. Hey, Freddy!

Freddy: Hi, morning!

Philipp: And as we all know from Episode 1 if you've listened to it, if not, please go back and listen to Episode 1 and that one, we kind of interviewed Freddy and he told us about his relationship with Gold and how, with his first paycheck he started buying Gold every time, slowly built up his Gold exposure, and that was usually physical Gold that he was buying.

So if you didn't listen to that, go back to that episode, super interesting insights there from Freddy and our second guest, and the guest of honour today is Robin Tsui. He is actually dialling in from Hong Kong. Hey! Robin.

Robin: Hey Philipp! Good morning.

Philipp: It's very good to have you, so to give a quick introduction but I want to go a little bit more into detail on a few of those intro paragraphs about Robin is he's the Vice President of State Street Global Advisors and the APAC Gold Strategist for the Global SPDR ETF business.

So he really runs the Gold part of the ETF business for State Street, he's been quite influential there. I've seen him speak before on Gold, super interesting always either to have a panel before as well. So I think there will be lots to learn for all the listeners on that topic, because even prior to joining State Street, Robin held the position of Manager for Investment Product and Research at the World Gold Council, and this really the market development organisation for the entire Gold industry, right?

Robin: Yeah, that's correct. I was there for a couple of years.

Philipp: So, lots of Gold knowledge on both sides from an investment standpoint as an investor. And from Freddy’s standpoint as well as a product specialist on Robin standpoint. Before we get into the Gold topics I want to discuss, I would like to learn a little bit more about your background Robin.

We usually talk with our guests a little bit about their backgrounds, how they were brought up, what's their relationship with money. And so, what has it been for you? When you were growing up was there any mentor? Or maybe your parents got you interested in investing because they were saving for you, whatever it may be, what was your growing up like and when it came to personal finances, when did you get first exposed to it?

Robin: Yeah, so I grew up in Hong Kong, but as you can tell from my accent. I actually grew up in Australia. Born in Hong Kong grew up in Australia. So I lived in Australia for about 22 years before I decided to come back to Hong Kong 10 years ago.

So, how did I get into the industry? So my dad is a lawyer, so he is still a lawyer. He didn't actually advise me on anything. So, it’s more during high school in Melbourne, Australia, finishing university. And, the thoughts of investment and money always interest me.

Philipp: Yeah

Robin: I think growing up in an Asian family you always have a thought of money in your head, so the parents say become a [05:00] doctor, lawyer or accountant, which I did start as an accountant. So I started an auditor at Ernst & Young in Melbourne, so there wasn't any guidance, it just happened naturally.

I wasn't smart enough to get into med school, probably wasn't smart enough to become a lawyer. Then it just happened then I got into Commerce Info System at Melbourne University, majoring in accounting and finance, and also did a degree in info systems surrounding website development, IT systems.

Philipp: So completely separate?

Robin: Yeah, completely separate. So, naturally I got in some applications at accounting firms, and then it happened from there. So I didn't really plan to go into finance but naturally just went into it.

Philipp: So may I ask you then, your background when it comes to finance, it seems to be very geared towards Gold, right? So what was the interest, or how did you end up getting into that field of Gold in general?

Robin: Good question! So when I started my first job as an auditor, so I wasn't covering any gold companies or mining companies, I was auditing financial companies, the UBS -

So when I decided to come back to Hong Kong, I wasn't interested in auditing because the role is quite boring, so you have to work like hell.

So, it wasn’t my cup of tea doing accounting. And then, I came back to Hong Kong during 2008 during the financial crisis, and I managed to get a job as an Equity Research Analyst in a local securities firm in Hong Kong and that time, the boss asked me, which sector would you like to cover? And I said banks. Because, I have some ideas about auditing banks, and I’m probably most suited to the financial industry, then he goes “Oh no, no, no! There is already a team covering the financial sector. How about the mining companies? You were raised in Australia, you should know something about mining.”

Philipp: Of course   

Robin: At that time, I have no idea about mining companies, and how it works and stuff like that but I just said yeah, I am into mining, I love Gold. At that time Gold was about to shoot up because of the GFC. And then that is how it started as an Equity Research Analyst covering metals and mining but Gold was one of the focus sectors in my first three years, because during 2008 and 2012 that was the sector that was heating up.

So I managed to cover about 6 companies in China that had exposure to Gold. Plus other metals like Copper, Aluminum, Silver, but Gold was my core when I started my first job as an Equity Research Analyst.

Philipp: And then from there the next one was already at the World Gold Council then or is it directly flowing into this one or did you do something in between?

Robin: So, I moved to cover more companies over the next few years. And then in 2013, the World Gold Council was setting up the office in Hong Kong. So they approached me to see if I’m interested in joining.

And because I covered Gold, I knew the World Gold Council. They are the authority of the Gold market, and that was something that was quite interesting, because I mean there's only one World Gold Council in the world. So I thought that would be a unique opportunity just to try and have a go and also just taking a different direction in terms of career, because I’ve been covering mining companies for the last four or five years.

But doing something different going to the World Gold Council trying to launch more products. Gold ETF products, partnering with different institutions around the world just to push Gold demands globally. I thought that was quite interesting.

Philipp: Yeah, no super interesting and I think a lot of people don't even know about the World Gold Council if they think about Gold. And having that organisation behind it so I assume then the World Gold Council funded then by gold miners [10:00] and you know gold refiners. Is that correct?

Robin: Yes, they are funded by the gold miners. So, the members are the top 20 gold miners in the world and plus they partner with State Street my current company on the ETF product so basically State Street needed someone to market the product so I moved from the World Gold Council to my current firm, State Street Global Advisors, just marketing Gold products in APAC.

So yeah, that was the transition from the World Gold Council to the State Street. So I’ve been here at State Street for four years already.

Philipp: Yeah, such a long time. Time flies by anyway, so I've been saying the same. I'm now three years in Singapore. So it feels like I came here a few months ago. So yeah time flies indeed, but thanks for the intro.

I think it’s super interesting. I think a lot of listeners, especially also on the younger side, they always like to see because when you're in university, me and Freddy discussed this before as well when in university to make sense of what you want to do later on in life and all the pivoting that happens.

It's quite normal, and I think when you're in university you have this one set path or they tell you, you to have this one set path and I agree with you and Freddy's background, all of ours are quite the same. That you start pivoting off and life works this way, right? So it's not always all plannable.

But, if you work hard that tends to work out, so thanks for that Robin.

For the topic of Gold, I have, obviously, a bunch of questions. So, let's see if we can get through all of them in one episode, but I'm sure you have a couple of things that you guys want to talk about as well.

But how about either one of you, maybe you both have different opinions, or different recollections of this but let's go a little bit about the history of Gold. And, how it became a means to pay in the early days and then also a store of value because I think especially this year, and in crisis, you were mentioning the global financial crisis as well. 

Gold is always still seen as a safe haven. In global turmoil, and we can maybe go through the history and kind of see why it’s still being seen that way?

Freddy: I think Robin will be a great person to start with this. Robin, would you go ahead first? Thank you.

Robin: Thank you, Freddy. I think the Gold obviously has a long history. It dates back thousands of years ago when you know the first of humankind was using it as a currency. So throughout human history for the last thousands of years, Gold has always been the currency for payment, for exchange of goods back in the old days.

So when investors think about Gold nowadays, they are thinking about before, in the ‘90s, or ‘80s when Gold was the only currency that was acceptable throughout the world. So Gold has a really long history, and if we moved to the ‘90s the US Dollar was actually pegged with Gold.

So one reason why the US Dollar became, or I guess we’ll consider, as the world’s currency was because at that time, the US currency can be exchanged for Gold.

So basically, back in the day, you can take comfort that, if you own US currency, a note, you can have exposure or get delivery of the Gold from banks, or federal reserves. And at that time during the 1940s or 50s, most of the currencies were pegged to the US Dollar because given that the US Dollar pegged with Gold, you have the British pounds or the Swiss Franc, they are comfortable pegging to US dollars giving the Gold backing that US Dollars received.  So basically that’s one of the stories of how people today consider the US currency as the global currency.

It was mainly because of Gold. So, Gold actually pushed or made the US Dollar as the global currency in the banking so to cut the story short, because I've been going forever.

The US government decided to unpeg the Gold in the dollar back in the 1970s. Because they weren't enough Gold to back the US currency so at that time, the US government needed to print more money like today. To actually back the economy, because they were coming out from the Vietnam War, [15:00] where they needed to print money to stimulate the economy. So during the 1970s, Gold was officially unpegged to the Dollar.

So, from the 1970s to now, Gold became a sort of a free-floating asset, where investors can trade and buy Gold. Believe it or not, before the 1970s, no investors can own Gold. It was illegal to own Gold in the US before the 1970s. So, basically even though Gold is considered to be a very old asset class but we could not trade or buy Gold before the 1970s. That is one of the important facts that Gold is considered in the second world as a new asset because its history is only 15 years relative to other asset classes. So that is something young people coming to know about Gold should know about because that is very important as far as history of Gold is concerned.

Freddy: Fantastic, I think Robin essentially summarized the entire history of Gold in a very short time.

Philipp: Exactly, very concise.

Freddy: Yeah, but if I just recap for him, so Gold started in the US as the reserve currency from what I heard, and leaving Gold also started the return to the current banking system, which is based on the fiat paper money, which is also fractional, meaning if you have a hundred dollars in the banking system, banks in the system only need to hold supposedly, say, ten dollars in reserve.

And they can lend out the other 90 hence money can multiply in the system. Because you can lend out the $90, somebody else gets $90 to put back in the banking system. Banks hold another $9. Lend out the other 81 the process keeps going.

So it supported the modern expansion of economies. I think that is just to tie in with what Robin said at the last part.

Philipp: Yeah, totally. I think when we talk about store of value here because, since the global financial crisis ever since, obviously equities have been doing really well, even bonds have been doing really well, right? So people are always saying well, why should I even have any Gold, maybe now in a digitalised age Gold might not be working as well in the next crisis.

So what do you say to these arguments and how has it played out so far this year, for Gold, and in a portfolio?

Freddy: Yeah, we have quite a bit of argument very early days of StashAway, just to recap because when we first started we didn't have that much allocations to Gold and in December 2017, most of our portfolios went full allocations i.e, a lot of you will see 15% allocations in Gold. And a lot of people were asking us what is going on? Why do you like Gold that much? Why does the algorithm like Gold that much?

And that was when we look at it, it was at 1240. And recent years has seen Gold appreciating regardless of whether the stock market is up, regardless of whether economies are growing or not.

It has gone up, and then in bad times, it actually goes up further. So this year, it has proven itself as a portfolio insurance. It's a commodity that provides insurance to portfolios.

So in a way, it has proven itself as a store of value as well. So it has done very well, over the years if you give it enough time.

Philipp: Yeah, I think this is where a lot of people always argue with me and when I tell them hey, you should have it, at least, some portion of your portfolio in Gold. But they’re like, “Oh yeah but it's not paying any dividends”. It just sits there and it's not gaining so much but it's more than that. You need it more than just as you know, I know it doesn't pay a dividend, but there's more to it and why should you have it?

Freddy: Yeah exactly we can go on and on about why we like Gold. But before we go on a rampage, it is good to acknowledge that it has proven itself over the years. Day-to-day it is difficult to time the market in Gold, but taking a [20:00] long-term view has been extremely lucrative.

Philipp: Yeah exactly, Robin anything from your end there or you pretty much agree with Freddy?

Robin: Yeah. Yeah, I agree with Freddy. But I just want to touch up on I think Gold like it's a very unique asset class as Freddy mentioned. Gold is driven by many factors. That's why it has very low connections or correlation with other asset classes like bonds. I think one of the beauties of Gold is that it has such a unique nature in terms it’s driven by investment so during this year a lot of demands driven by uncertainty, and investors buy into Gold because they are uncertain about the environment and how the dynamic will play out in the future.

Gold is also driven by expansion so don't forget that Gold is driven by jewellery demand in China. It’s driven by technology. So computers like in your iPhone there are certain parts on your computers or iPhones that need Gold to do the functions.

So if you look at Gold, even though during times of uncertainty, the price and demand will go up, but then during times of expansion, it will be driven by jewellery and technology. So, that's why you’ve got to hold Gold over a long term, because through different cycles, it will be driven by different demands throughout the sectors. So that’s why it makes Gold so unique in a way that, no other asset class has this function, and on top of that central banks around the world are buying Gold so you have the central banks of Russia, Turkey, China, they are aggressively buying Gold on a yearly basis, which means that, they believe that Gold plays an important role in the financial system.

Philipp: And I don't think not only just central banks, if you listen to the news or if you read on your Bloomberg, you hear a lot of the big hedge fund managers in the US privately buying Gold as well as coins and everything. Because they are really worried about what the future holds in terms of the free printing of money, everywhere, and low-interest rate environment. So I think that also has probably something to do with that.

Freddy: Well, with the COVID-19, and the massive amount of policy bazookas that we're seeing around the world. This concern became even more elevated and Gold actually went up a lot during this whole market crash this year.

So from that angle, it’s not only hedges you for a market crash, it also sort of protects you from the dilution of paper money created by the central bank's policy stimulus. Just to add to that. There's another angle. I don't know if Robin would agree. It's a hypothesis. In my opinion the COVID-19 may open the rift among countries in the EU further. It's been a lot of dissatisfaction among countries with how the rescue packages are coming in.

Philipp: They are discussing it right now all over the German news, and I've been watching.

Freddy: Yeah and you can’t help but wonder there's always this risk of a few situations where the European Union may change its structure and it could be the fact that the more developed ones like Germany and France actually choose to leave or the other way where the ones being told not to spend, wants to leave and Brexit already happened. So I think those scenarios actually is one of the reasons why a lot of individual country's Central Bank even in Europe, even though they don't have control over their own monetary policy because it's all unified now, the individual countries are buying Gold they're holding reserves, are buying it systematically every year.

Just to add to Robin's point that central banks are buying Gold. It's not just China, it is not just a big countries, there’s actually quieter amount of purchases done for the individual countries in EU as well.

And I think one of the reason is that one day if you actually, this break up by the European Union risk materialises what happened is, individual country has to start issuing paper money again for the first time in the long time.

Philipp: Yep.  

Freddy: And what better ways [25:00] to first create an anchor effect for your new currency, then to have a Gold-backed system like the 70s first to start your new paper and once things stabilise you can wean yourself off the Gold system and go back to a paper money fractional banking.

All right, so I have that's how I sort of see the movie play out in this crisis. Call me a sceptic, but I'm a risk manager as well.

Philipp: So yeah, I know absolutely would you agree with that Robin on your end?

Robin: I totally agree with Freddy. I think there will be a lot of geopolitical risk going forward given what happened the last couple months. I think the money printing is definitely a case where I think our clients are concerned about the currency devaluations in terms of US or Euro, which we have seen this year the currency market is not doing that well. We saw the Aussie dollars got hit, the pounds got hit. So if you look at Gold as a currency, it's up 13% this year so it outperforms most of the major currencies. So I think the beauty of Gold, it can't be printed as we know and the growth in productions is very limited. So I think that's one of the major factors why in the long run, I think Gold will continue its rally because from a currency perspective, it just can't be printed.

We’ve already seen in Turkey, they are already issuing bonds, using Gold as a backing already so central banks are accumulating Gold to issue products to give comfort to investors that the ultimate product is backed by Gold.

So I think going forward, we might see the upward trend in terms of central banks offering products that's backed by Gold. I can see that coming in the next years, hopefully!

Philipp: That is super interesting development. So let's say, I want to change gears here, but we talked about, benefits of Gold and, what the trajectory might be in the future and especially with private hedge fund managers buying Gold, governments stocking up on their Gold reserves.

Let's say we get the listeners to be interested in Gold, what would you say? There are a couple of questions I have for them basically, but first of all, why should every investor have some allocation to Gold? I think we covered that a little bit from a more institutional level, but why should an individual investor have some allocational Gold and to follow up on this and how much Gold is enough?

Because the way you guys are speaking is yeah Gold is really good and its long-term even is better. There's a lot of utility for it, you can make an investment case in good as well as in bad economic times for Gold. Why should I just not have everything in Gold, if it's that good?

So maybe those two questions would be super interesting for listeners to get some answers to?

Freddy: You want to remind me of that first one again?

Philipp: The first one Freddy was, why should every investor have some allocation to Gold?

Freddy: Okay. Let's tackle that first. Let me steal Robin’s show for a sec here. I think every investor needs more Gold than they think and I'm going to give a bit more stronger point on this. A lot of people say you should have 5% percent of your portfolio in Gold. I beg to differ.

I think you need as much as 10 to 15% in the times we’re in where massive amount of policy stimulus that is gonna dilute the purchasing power of paper money. You need more. And if you are not a residence or a citizen of a safe haven currencies, you're not from Switzerland. You're not from Japan or even your funding currency is not the US Dollars, the risk is even larger for you because when you invest internationally outside your home country, like when you invest in assets, you need to also prepare more for the dilution of money created by this policy stimulus in the US.

So if you have a lot of US assets, you get exposed to the US dollar, and the US dollar is printing and so you need a lot more Gold to offset the impact of your other assets in the US and other countries around the world.

So you need more Gold in that effect it's simple math for you. [30:00] If a hundred dollar invested globally if the purchasing power of paper money is going to decline by 10% in coming years your portfolio in real purchasing power terms would be worth $90. You could do nothing about it.

So how much Gold do you need to offset that? If you have $10 out of a hundred in Gold and go rallies 50% in coming years, you only just created a $5 insurance. You probably need more Gold than you think it depends on the scenario or the fair value of Gold.

You need to do quite a bit of homework to determine the right ratio, but in general, you need a lot more Gold than you think.

Philipp: Super interesting point of view, I think because a lot of people when they start saving, start investing towards their short, medium, long term goals. They don't take this helicopter view that one should and actually allocate the assets accordingly with that, and with a little bit more thinking behind it it’s not just hey, I'm going to buy some equities and some bonds, there's more to portfolio construction. What about you, Robin? What would you suggest for people to have in terms of allocations to Gold? Any set percentage or what would be a guideline that you like to use maybe even for you personally?

Robin: We do a lot of research at State Street in terms of what's the optimal allocation to Gold. So if you hold a diversified portfolio, so you have 50% equity or 40% bonds for example, we do encourage holding as Freddy said, about 2 to 10%. This is a type of strategic allocation, which means that on a yearly basis you kind of rebalance to make sure you achieve around the 2 – 10%. So, 2 – 10%  I think it depends on your view on Gold price or how aggressive you want to be we have clients that goes above 10 %, let’s say 15%, 20%, 30%, 40%, but from a strategic long-term allocation, we think the 2-10% is a good starting point, and then you can just adjust on top of that. If you think Gold price will rally could say, $2,000 next year. So it really all depends on the investor. So like Freddy, he's so bullish on Gold, he’s on 15% allocation for that. But I think somewhere between 2- 10% is sufficient because we do see Gold as a kind of like an insurance to your portfolio. So it provides that diversification to your portfolio especially for low correlations, no connectivity to other asset classes. So as a portfolio insurance, I think that amount of Gold is efficient for a typical investor.

Freddy: Just to clarify, it's 15%. 

Philipp: Yeah exactly. Freddy it's 15%. No, but that yeah, so that's interesting how you think about it I think portfolio insurance we've heard now many times, and I think hopefully this rings a bell with the listeners to not just see it as like this huge growth investment, but it gives you more than just that and I think we talked about this at length already and hopefully that came across as well for everyone.

So let's say, they know now the allocation, they like the history of gold, they are fully on the same page as we are, they want to get some allocation to Gold. So what is the best way to get access to it?

I know you can buy physical gold at your bank or at third parties. You can, you were saying you were covering gold mining companies. So people can also buy gold miners, they can also buy ETFs that are backed by Gold. So there's a lot of ways to do it and to give a quick experience that I had here not too long ago probably five, six, seven weeks ago when we're still able to go to the office.

I always pass here in Singapore. I pass along the Waterfront and then there is a store it's called Bullion Star something like this, and they sell physical gold bars and coins and you won't believe it but there were lines out of the door.

So a colleague of mine and I went on the website actually and you, there was a way to see it, to buy it online then stand in line around the block for three hours to then go be able to purchase your gold bars.

And if you go on their website [35:00] now, it's even difficult to buy any gold bars because some of the refiners have shut over in Switzerland, some of the big ones because they had obviously the same stay-at-home notices as most of us are enduring. 

So, that was just a quick episode. I don't know how it is in Hong Kong for you Robin if you seen the same or in general, but I think getting people to understand how they can access Gold. And what's the best way for each of them would be super helpful.

So I leave it up to you maybe to go through to you guys to go through a couple of the different ways of getting exposure?

Freddy: Robin, why don’t we take turns on each avenue. Let's say in the physicals. What's your typical way of getting access? Just curious about how you do it. 

Philipp: Yeah, would you even do it?

Robin: Yeah, I think there are so many ways to get exposure. In fact there’s at least seven ways to get exposed to Gold, ETFs, funds, physical, futures, mining and etc.  So, physical gold I think it depends on what type of investors you are usually, the most conservative investor will buy physical gold because literally you can hold the gold and store it in your house for example. So if I talk to the most conservative investor, they still prefer to buy the physical gold.

But I think one of the cons of that is that obviously you have to go to a shop so in Singapore right now, you can't go to this shop, the shop is closed. So you want to get exposure, that could be some limitations physically going to the shop and buying the gold, and I think another disadvantage is that usually, if you buy the gold through a shop, they would charge you a premium because they need to pay for the rent, and the labour.

So it might be that they will charge about 4 to 5% over the spot price of Gold. So literally you get hit by the extra premium they charge and I think one of the difficulties is where to store the gold.

Let's say if you had $2 million worth of gold in the US and are you comfortable to put that in your house? Or you put it in the bank? So I think the storage consideration is very important.

Philipp: And storage is quite interesting now, because especially now let's say you're stuck for months at a time in one country and you can't really travel to the other country where you may have stored some of that gold, that also could potentially put you in a precarious situation if you've been banking on it having that immediate access.

Robin: Yeah, exactly.

Philipp:  Well Freddy, You like physical gold. I remember from our first conversation, you said hey from every paycheck since the first one you started to buy a little bit every time?

Freddy: It was more jewelry related. It was more like a tradition, started by my mom first because Chinese families, we grow up and when you get to a certain age your parents will commemorate certain memories, and key years of your life with a gold chain, and some sort of jewelry.

And I remember back in the early days, it’s heavier than now. Every piece of gift I got from my mom is a lot heavier than today's jewelry. And so you get more content in Gold back then, but we started that tradition, we continue it with my daughter, where every birthday of my daughter we will buy a small little piece of gold-based jewelry.

We did make the mistake of not going for yellow gold. We do go for a white gold and the versions that don't always hold value as well as pure yellow gold! But yeah, that's more sentimental, more jewelry-based than an investment and the spread is humongous like Robin has mentioned if you want to trade it. I think I am expecting to lose 10% or even 15% just in bid offer!

Philipp: What is the premium you pay for having it in physically. That’s just the inherent downside of that?

Freddy: Yes. So in summary, I prefer a more digital and paper version of investing in Gold.

Philipp: Yeah, I think I want to get to the digital or investible [40:00] one here in a second. But the one thing before we get there is I think a topic that is quite confusing to a lot of investors is gold miners. Because you always hear these stories that all Gold prices are going up, gold miner stocks are going down or they're not working as people would assume if they don't do that much research.

A lot of people think oh, wow I bought these gold miners, the price would go up with Gold as well because they are mining the Gold. So maybe Robin, can you give us a quick overview since that's something you study quite a bit in your previous jobs. How does investing in gold miners differ from investing in Gold itself?

Robin: Yeah. That's a great question Philipp if you are investing in physical gold or gold-backed ETFs you get that one to one relationship to Gold price.

But with gold mining, it gets a bit tricky because even though gold miners might produce the gold as a business but there's a lot of consideration to consider that's more important for example, the extraction costs of the gold or the production cost of the gold, plus the management, how effective the management is running the company, and also you've got to consider where the mines are? Are the mines in Australia that’s more environmentally-friendly, or are the mines in Africa where the infrastructure could be lagging behind other countries?

So there are lots of factors that you need to consider before you buy into gold miners and I think one of the most important considerations is that gold miners they usually have a high relationship with the equity market.

Which means that they have a very high correlation with the equity market. This means that when there's an equity market downturn, usually gold miners will get a hit. So they won't provide the insurance or the diversification you need to protect your portfolio. So that's something listeners or youngsters need to consider because, when you look into a mining company you got to make sure all the factors are thoroughly researched.

And also the gold miners could be producing other metals as well, like copper, silver, and platinum. So you want to make sure the business is quite well and sometimes it would take a long time to research and by the time you've done your research, Gold price could rally 10% already.

That's something I guess you can consider that.

Philipp: I think the important part here is actually the diversification part. So even though you think you're in your mind, you might think, hey! I got that diversification, the different correlation to equity markets, but you don't. And so that could really backfire to you then if you were planning on using it as that.

 So I think it's a very good point there.

Freddy: I would add another point on gold miners -The act of mining itself is exploration as with any exploration, you will incur a different kind of risk like you need to conduct your research on the geology of the area that you want to mine if it’s new and what's remaining in reserves and you need guess it is a lot of guesswork and science as well.

But you are taking the risk of exploration. It's not the same as being just purely invested in Gold other than the equity risk, the business operation risk, management risk and you are also taking the risks of exploring and you can explore and be wrong about the area you are exploring and you get nothing!

Philipp: Yeah, absolutely no, very good point. So which then brings up to a third way of in getting exposure to Gold and that is through, either investment funds or nowadays through ETFs and Freddy you were saying so this is something that you like quite a bit in order to get exposure.

Maybe you can explain a little bit about that. And then I do have a couple of questions because there are some people saying certain things about the way that ETFs are backed and how they work but maybe first explain kind of how would that work to get exposure to actual Gold through things such as ETFs or investment funds?

Freddy: Well, I mean if I look [45:00] at digitally doing it instead to the question, you can buy Gold futures but as in any futures trading, it incurs margin and you may be tempted to lever it.

So I prefer a more one-to-one approach where the buying good exchange-traded funds that track Gold, has a good history of tracking Gold, that to me is actually the most philosophically sound way of investing, and there's a lot of funds out there that tracks Gold, but they're not made the same. You do have to do some research as to how the Gold is stored and backed. So but there are some ETFs that are actually more levered. Like, they don't actually hold the one to one the amount of Gold in the fund, and those funds I would not recommend because as we've leveraged if Gold is down 10% temporarily and you’ve levered it 10 times you could see massive drawdowns in the fund as well.

So I would stick with non-leverage one-for-one sort of Gold physically-backed Gold ETFs. That would be the most efficient, cleanest way of doing so.

Philipp: So with that being said, Freddy. There’s obviously a lot of talk in especially, probably more in the doomsday-sayers camp. But a lot of people don't really trust even ETFs that have physical backing of Gold in vaults across the world because they said hey, I can’t actually get access to this Gold. Is it actually there? How much is there? You know and things like that. Is there anything maybe either one of you relate to that. So it seen when you read a lot of news articles, a lot of people are trying to get out of ETFs and buying the physical gold. I'm not saying a lot so it's probably a small percentage but that's still a discussion that is ongoing in that space.

Freddy: Yeah. I mean I would say this, some Gold ETFs like GLD is a trust, it’s set up many years ago before most ETFs even existed. It has a long track record of managing its Gold reserves.

And it’s physically-backed then I think the Gold is stored in the vaults of, I think it's HSBC in London. If I'm wrong, it’s JP Morgan, one of those and Robin could correct me later, but it's physically backed. So obviously if it's that big a fund, you can’t possibly go through every single gold bar and you know, but in a way, there's a lot of effort made to standardise the kind of gold that goes in there.

It's a trust that's been that's audited, so it's good to know whether a fund is audited, whether there's a trust structure and has a long track record of managing itself. And I think GLD is one of those, there are not many Gold funds out there that have such a long track record of managing it and it's not just about what is the cheaper fund to buy into, lower expense ratio and all. It’s really about the managing history of the fund with relations to its gold reserves.

Philipp: Robin do you wanna add anything in general to ETFs and how they in investing Gold or if that’s a good way to do it or any downsides you see there or pros other than what Freddy mentioned?

Robin: Yeah, I think Freddy mentioned some good points about ETFs. The beauty of the ETF is that it's simple and it's very cost-effective. So basically you if buy a Gold-backed ETF you are buying the spot price of Gold so you don't have to pay a large premium over the spot price and then you can trade through the stock exchange. So basically if you are lockdown at home, you can buy right now through your phone.

Philipp: You don't have to stand in line like these people I told you about before.

Robin: Yes, exactly. So, very good for social distancing. As Freddy said, there are so many ways or products that track the Gold price for each day. So you need to do your research on that as well. So basically, are they backed by Gold or are they using Gold futures for example, because there are some Gold futures ETFs in the market plus you've got to look at obviously the charges. [50:00] And one important thing is that you have to look at how liquid these ETFs. So, the more liquid in terms of trading volume on the exchange, the lower the bid-ask spread. The lower bid-ask spread is what will actually decrease your transaction cost.

So even though Gold ETFs appear to be a simple product, but then you should spend some time looking at different products. Look at the spread, TR, where the vault is located as Freddy said in London typically London is the gold market for Gold.

So if the ETFs is located in London, the vault is located in London that will give you some comfort surrounding the Gold and some of the providers do provide the Gold list on the website. So if you're not comfortable about whether the Gold exists, you can go to the providers’ website and you should be able to see the Gold bar listing on the website.

Philipp: I think I read before, correct me if I'm wrong, either one of you, but I did read before that if you for example in some of the Gold ETFs that are available, that are physically backed, if you have a certain position size, you can actually exchange for the physical Gold at some point. I think it's large sums obviously like a hundred thousand units or shares in that ETF for some of them, but I think that's true.

Robin:  There are some available, so some of the bigger ones might not be available for delivery. But in the last couple of years, we've seen new products coming in which offer delivery. But I think that’s more of a gimmick or giving comfort to investors, if something happens you can retain but as you said the charges are enormous.

Philipp: But how are you going to get these around the globe? Shipping, storage?

Robin: I don’t see a lot of cases where people ask for delivery. But obviously it gives them comfort around, if they needed to they can but the charges are large you can they can charge up to 5% of the overall market size of your share in the fund. So it doesn't make sense to take delivery sometimes.

Philipp: Yeah, so thank you guys for this. I think we're about to wrap it up here, but I have one more question. I think it's a big elephant in the room, little less noise, the last year and a half probably but certainly the two years before that is Bitcoin. And the reason why I bring this up is because when we look at we talked about digitization, digital ways of getting exposure to Gold.

And Gold being seen as a safe haven and helping with, in times of central bank's pouring, printing money. A lot of people say that the digital Gold is actually Bitcoin. So I would love to have both of your opinions on, do you see Bitcoin as so to speak as that, that can be replaced Gold in the future as the safe haven, or maybe they both exist in that environment? What are your opinions on that? Because I know a lot of people will want to hear your guy's opinion on this.

Freddy: I'll let Robin go first because one I go, I cannot stop.

Robin: Thanks Freddy. So, Bitcoins, obviously a few years ago there have been lots of discussion around whether it can be Gold number two, or version number two. Because between Gold and Bitcoins, there are some similarities in the way that it's not owned by the government. So it's very independent to other money or other asset class controlled by the government or monetary policy, for example, so there are some similarities in the way, but I think given what happened to Bitcoins last year or this year, you can see the volatility is quite high. You can see its value went up to about 20,000 dropped down to 8,000 so the volatility is over 100% annualised compared to Gold let’s say 15% on average. I think one of the key of Bitcoin is that it doesn't have a track record. So Bitcoin’s been in existence maybe around ten years or so but compare that to Gold 7,000 years.

I think a lot of research still needs to be done on Bitcoin whether it can provide that diversification relative to other asset classes and I think another key is the liquidity. [55:00] I mean if you buy Gold, you can be pretty sure you can sell the Gold, you know anywhere, either ETFs or to a store. But in terms of Bitcoins, once you buy, are you sure that you know how to sell it? What are the ways to sell it?

To me, I'm not even sure like how to buy or sell Bitcoin, what platforms are there to buy and sell. So I think the liquidity, the lack of track record, and also whether it can provide that diversification, I think there still needs to be some work to do or research upon Bitcoin.

Freddy: Right, my turn?

 Philipp: Yes, it's your turn, Freddy, it's your stage now.

Freddy: I'll be cautious. I would say when it comes to cryptocurrencies. It depends on what you’re backed by and the concept of Facebook's Libra is a very interesting one. Unlike Bitcoin, because it is backed by Reserve currencies which earns interest and is anchored by something that has close to zero volatility.

And hence, the resulting currency like a Libra, it's stable and when it's stable you will induce confidence to transact actively to buy your pizza and currently if you want to buy a pizza with your Bitcoin, before you click the button and know how to sell it so that you can buy the pizza. The price has moved a lot.

The volatility is quite a lot. So that is not a cheap way to purchase not a cheap way to transact fundamentally. And it's also important to note that what I'm going to say now is not even well known by the technologists in the area because theses are financial concepts. You've got to also as an investor move beyond the so-called technology.

You have to understand the Metcalfe’s law. The Metcalfe’s law is like Moore’s laws of processing chips. It is one of the laws that govern how to value network effects. If a cryptocurrency is not backed by a physical asset then you are a utility token, it's just a satisfaction of you sending your coin among yourselves or to transact.

And that utility value is based on the value of the network, and the network's value is based on the proportion of the number of people actively using it. The monthly active users in the network, and how active they are among themselves. So the value of the network, this concept, Metcalfe’s law, can be used to value companies like Amazon, Facebook, and Tencent similarly because they have very strong marketplaces, communities that buy and sell, seriously they transact.

So if you apply that approach to Bitcoin, inherently, the Metcalfe’s law says that the volatility of cryptocurrencies is going to be quite high because the relationship between the value of the coin is equivalent to the square of the monthly active users. So if you have an increase in monthly active users, it has a square impact positively on the value of the coin and conversely if you actually because it's like thousands of coins now, is somebody competed away demands and users from you, it is gone from say the Bitcoin network to the Ethereum network, you lose monthly active users. There's a square negative impact on the value of your network. 

So, it is by design, volatile, it’s not going to change. As long as something that is not backed by a physical assets, that’s of a low-quality nature and it's completely based on utility, you are going to be volatile. So, that cannot be Gold. Gold is one of the avenues central bank's manages their reserve, it’s actually considered a reserve currency. Correct me if I'm wrong Robin. US Dollars, reserve currency, Japanese Yen is a reserve currency, Gold, when central banks when not wanting to stocked with US Dollar reserves, they buy Gold. So, it's a very different status. I can keep going on for another two days. I'll stop here.

Philipp: So I think that's it. That's another topic I think we can dive into in future episodes. So because I think that there's a lot of misunderstanding about Bitcoin and things like that, that we would happily get into in more detail in the future though.

So both of you to wrap this up, I think the listeners will have gotten some super valuable insights into Gold. I did myself.

Of course, I always learn from both of you whenever we do these things so I thank you very much both [1:00:00] for your time to join us. I think it was a super nice discussion. I'm sure there will be more to come in the future, because we just touched everything here on a high level but I think in a very concise manner and I think lots of people will have a better understanding and much nicer and easier way of getting into Gold, and why they need Gold in their portfolios. So thank you both very much. And with that, I want to say goodbye to you guys and we will certainly speak again soon. Till next time!

Freddy: Yeah, until next time.

Philipp: Bye, Robin!

Robin: Bye guys, stay safe.


Disclaimer: The views, information, or opinions expressed during the series are solely those of the individuals involved and do not necessarily represent those of StashAway.

Episode notes

In this episode of In Your Best Interest, Robin Tsui, Vice President of State Street SPDR ETFs and their APAC Gold Strategist and Freddy Lim, Chief Investment Officer and Co-founder of StashAway talk about how to invest in Gold. Having previously worked at the World Gold Council, Robin brings to the table a wealth of knowledge about Gold investing. We uncover the importance of Gold in the financial world and why central banks are building up their Gold reserves. We also demystify what makes Gold a unique asset class and how you can use it for portfolio diversification. 

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Episode contributors

  • Philipp Muedder (Head of Financial Planning at StashAway)
  • Freddy Lim (Co-founder and CIO at StashAway)
  • Robin Tsui (Vice President of State Street SPDR ETFs and APAC Gold Strategist)