What are profitable strategies for gold savers?
Gold can be considered both as savings and investment. But it would be better for those who have not allocated emergency funds (six months' worth of income) to set aside emergency funds first before diverting into gold trading.
After setting aside emergency funds, the saved money can be utilised for the trading activities (buy low, sell high).
The mindset of a gold saver
The groups of people who buy gold for long-term savings are known as gold savers. Gold savers intend to increase their grams of gold. For instance, if the amount of gold collected this year is about 100g, then by the end of the following year, the target of gold would be about 150g. In this process, the fluctuation in the gold price does not influence them.
Gold savers are not affected by gold price movement because their end game is different. When the gold price appreciates, they feel happy because their wealth has appreciated. How about when the gold price drops? They would feel much more satisfied because they get to buy an expensive asset at a lower price. Could you see the difference in their way of thinking? This gives them peace of mind as compared to gold traders.
The best time to buy gold
Basically, the best time to buy gold for gold savers is whenever they have additional funds intended for long-term savings. The ideal duration is about two to five years when the funds are not immediately needed. Whenever such funds are available, converting them into gold for long-term savings is the next step. Waiting for the best price has little effect on this strategy due to the following factors:
Most important factors
- The monthly purchase would not be huge, but it is consistent nevertheless. For example, gold savers can adopt a ‘one gram per month’ idea in which buying one gram of gold every month would ensure that the gold amount is being accumulated over time. If they happen to buy gold when the gold price is ‘low,’ it is a bonus.
- When gold savers do this consistently, they experience the average buying price phenomenon. Let’s say if three purchases were made over three months at SGD 70, SGD 80, and SGD 90 per gram (as illustrations), then the average purchase price for all three grams would be SGD80.
Next important factors
- Looking at the volatility of gold prices, keeping the liquid cash aside for the best opportunity might not be helpful. Typical price volatility is about 3% in a month, but if we used up 50% of our cash on other expenses, isn’t this a missed opportunity? Hence waiting for the gold price to reach a low level may not be as intuitive as we think.
- Last but not least, gold savers have a long time horizon. They do not save gold for short-term gain. Gold is a form of forced saving where they deposit and ‘forget’ about it. Another term for this is known as ‘forgotten saving’. If they need cash for immediate use, they can continuously tap on their emergency funds as allocated previously. So, worrying about gold price fluctuations has no impact on them.
The best time to sell gold
As stated previously, gold savers are not concerned with short-term gold price fluctuations due to their end game. However, there are times when gold savers can consider selling their gold:
When the intended target is achieved
Examples include a deposit for a new home, capital to start a business, or savings to perform Hajj. When the target has been achieved, they can simply sell their gold to cater to their goals. Similar to parents who saved for their children's education fund. When the child is expected to join college or a tertiary institution, the gold can be sold for this purpose.
Opportunity to convert one asset into another
As we go along saving our money in the form of gold, we might encounter new opportunities where we believe we can yield higher returns (provided we have conducted the risk/benefit analysis). For instance, building a homestay where tourists are expected to visit frequently can be a good investment with decent ROI. Tuan Syukor Hashim, a prominent figure in the gold savings field in Malaysia, did precisely this when he decided to sell a portion of his gold savings to build a homestay some time back. Some business owners can also utilise their gold savings as working capital to expand their business, thus limiting the application.
Presence of emergency
This could be true when the emergency fund (three to six months' worth of income) has been fully utilised. Instead of borrowing money that charges high-interest rates, it would be better to sell the gold and address the immediate needs.
We understand from these situations that the underlying reason for selling gold was not motivated by the gold price but by external factors. Hence the extent of gold appreciation does not matter to gold savers when they come across the situations as stated above. In addition to selling gold, another alternative available to gold savers is by pledging the gold for a quick loan. This is possible if they can recover the fund and reclaim the gold.
Depending on our position, whether as a gold saver or gold investor, the strategies employed differ from one to another even though the tool utilised in both situations is gold.
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Your buddy on gold investing,
Naresh G