Safe Haven – Gold or Bond?

April 18, 2017

Geopolitical events & Risks

We all know about the U.S. missile strike 2 weeks ago, in which they launched 59 missiles on a Syrian government airbase. Last Thursday, they dropped the largest non-nuclear bomb in Afghanistan. And last but not least, multiple senior U.S. intelligence officials have said that the U.S. is prepared to launch a pre-emptive strike if they become convinced that North Korea is about to test a nuclear weapon. The failure of the North Korea’s missile test yesterday have alleviated the tension but the risks are still there.

This series of military actions seem to signal that President Trump has taken on a more hawkish geopolitical tone. We know that geopolitical instability is bad for businesses. This will no doubt cast some fear in investor’s mind and we should see more of them shifting funds into less risky asset classes.

Less risky asset class like bonds will see a drop in yield due to the increase in demand. The prices of gold and gold-related equities are also expected to continue to increase as it is usually seen as a hedge against volatility.



Bonds

Bonds pay a fixed coupon or interest rate to the holder at a set interval on the principal amount over the duration of the bond. Some bond issuers are safer than others, and some bonds are backed by collateral.

If the issuer is unable to do so, it will result in the default of the bond and the investor may lose all his principal amount.

As such, bonds issued by companies or governments with high credit rating (a measure of the ability to fulfil financial commitments) are usually sought after by investors.

It is also worthwhile to note that bonds are also considered as debts and are placed higher in the hierarchy than equities when receiving pay-outs in the event of company liquidation.



Gold

This shiny precious metal has been regarded as a financial safe haven for centuries. Holding physical gold, unlike bonds or equities, does not pay the holders any interest or coupon. Investors actually have to pay a fee to hold gold in safe vaults.

So why do investors still pay to hold gold? Other than the mentality of gold being a safe haven, gold price has demonstrated inverse relationship to share prices in times of volatility, making it a good hedge for it. Investors are banking on the capital appreciation of gold to exceed the cost of holding it.

An alternative to holding gold will be purchasing gold-related equities product. Some examples of such equities are CNMC goldmine, a mining company for precious metals and GLD $US, a gold ETF.

Factsheets

1 year price movement of STI vs GLD US$ on POEMS Mercury


We can see from the above chart that there is inverse relationship in the movement of STI and GLD US$ during late June 16 (Brexit) and Dec 16 (U.S. president election), which are well known periods of market volatility.

In summary, holding bonds or gold each have their own advantages and risks. Investors will have to gauge their portfolio and time horizon before deciding which one is more suitable for their needs.

If you wish to know more information about ETFs or any other stocks, you can speak to your designated Trading Representatives or a Dealer at a Phillip Investor Centre near you.

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About the author

Chong Kai Xiang (Kai)
POEMS Dealer
Raffles City Dealing Team

Chong Kai Xiang (Kai) is an Equities Dealer in the Raffles City Dealing Team, and currently provides dealing services to over 35,000 trading accounts.

Kai frequently conducts seminars to enrich his clients' trading and financial knowledge. Apart from this, Kai also provides weekly market updates to his clients to keep them informed and up to date on their stock holdings.

Kai holds a Bachelor Degree of Finance from the SIM University – UniSIM and was awarded the CFA Singapore Gold Award and CFP® Certification Achievement Award in 2015.

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