Exhibit A

I don’t know. Maybe it’s a one-off thing but I’ve begun to notice a lot of so-called investment gurus in Singapore who have quite a following because they seem to be able to make well-reasoned arguments.

The problem with many of these so-called investment experts or gurus is that they either come from a non-investment professional background or they think that with the amount of advice that famous investment professionals on the internet, all they have to do is parrot the same thinking and things will work.

Gold! Gold! Gold!

Recently, I’ve seen some advice from Singaporean Investment experts advocating Gold as an investment in light of the times that we’re in. And they apply the usual arguments:

  • Gold is a hedge against inflation
  • Gold zigs while the markets zags
  • Gold will always be valuable

Now, while the points above may have some truth to it. Investors should also be aware of the potential pitfalls of investing in gold (see the link to the Of Dollars and Data post in tomorrow’s edition of ‘Best Things I’ve Read’.

Additional Considerations for SG Investors

While the usual pitfalls of investing in something like Gold are true for all investors, I wish to highlight another factor that many Investment Experts in Singapore often leave out.

Gold is priced in US dollars (USD).

Far too often, when recommending investments in foreign assets, many experts forget that currency matters. After all, a Singaporean investor starts off with Singapore Dollars (SGD) and therefore, all returns should be calculated in SGD terms. It probably will be the case that the investor cares about the returns in SGD as his or her purchasing power is in SGD terms.

Take a look at Exhibit A. It’s a chart of the SGD to USD exchange rate from 2003 to present day. Along the way, the USD has lost as much as 30% against the SGD and while it has climbed from the bottom, there’ no guarantee that the USD will appreciate further against the SGD*.

It’s not just gold

Now, before anyone thinks that this is a post against gold, let me throw in another example of a mistake when ignoring foreign currency flucuations.

Some years ago (roughly, 6-7 years if my memory serves me correctly), the local banks were encouraging many retail investors to take advantage of higher interest rates in countries such as Australia and New Zealand.

The basic idea was to convert your SGD to the either the Australian (AUD) or New Zealand (NZD) dollar, deposit it in a time-deposit in the banks there and earn the higher interest rates there.

Unfortunately, someone forgot to tell these investors that there is something called ‘Interest Rate Parity’. 1 AUD then used to trade for around 1.3 SGD but alas, now the almighty AUD trades for slightly less than 1 SGD. What seemed like an additional 4-5% return a year basically got negated by the 30% hit in currency terms.

It’s very basic but investors sometimes forget that (a) inflation matters, (b) transaction costs matter, and (c) local currency matters.

Notes:
*In fact, the fundamentals of international economics tell us that with the US being a developed economy with a persistent trade deficit, it is more likely than not that the USD will depreciate in the long-run. More optimistic folk would do well to remember that the British Pound was once as high as 6 SGD for each GBP.