You will be able to compare gold ETFs and bank gold savings accounts on cost, custody and protection.
After pricing a bar at two dealers, Aisha has second thoughts about keeping gold in a drawer at home. Her brokerage app lists gold ETFs she could buy in a few taps. Her bank's app offers a gold savings account where she can buy a few grams at a time. Both promise gold exposure with no bar to store. They work very differently underneath, and the difference decides what happens to her gold if something goes wrong with the firm holding it.
A physically backed gold ETF is a fund listed on a stock exchange that holds gold bullion in a vault, through a custodian, on behalf of the fund. Each unit of the fund is a claim on a small slice of that gold. You buy and sell units through a brokerage account during market hours, at prices that track the gold price closely.
You pay for this in several ways. The fund charges a yearly expense ratio, taken out of the fund's assets bit by bit, which covers storage, insurance and management. Lesson 3.1 of Build and run an ETF portfolio, Expense ratio and the costs it leaves out, explains how that works for any ETF. You also pay brokerage commission each time you buy or sell, and the bid-ask spread on the exchange. If the ETF trades in US dollars, which many gold ETFs do, you pay a currency conversion cost on the way in and again on the way out.
The custody question has a clear answer with a physically backed ETF. The gold belongs to the fund, held by a custodian and kept separate from the fund manager's own assets, with the arrangements set out in the fund's prospectus. If the fund manager failed, the gold should still belong to the fund and its unitholders. Check the documents to confirm the fund holds physical gold. Some gold products track the price using derivatives instead of holding bars, and those carry the risk that the other side of the contract does not pay.
Expense ratios, trading currencies and listing details are all in the fund's factsheet and prospectus, and they change, so read the current documents of any fund you are considering. This lesson names no fund.
A gold savings account is offered by some banks. You buy gold in grams, often in small amounts, and the bank records the grams against your name. You can usually sell back to the bank at any time during its trading hours. Some accounts let you convert your balance into physical bars, subject to minimums and fees.
The costs look simpler because there is often no yearly fee. The cost sits in the prices instead. The bank quotes its own buy and sell prices for gold, and the gap between them works just like a dealer's spread in lesson 6.2, Physical gold: bars, coins, storage and spreads. The bank sets both prices, and the spread can be wider than on a large bar or an ETF. Check the bank's current buy and sell prices on the same day and work out the spread as a percentage, as you did before.
This is the most important question to ask about any gold you do not hold yourself.
In an allocated arrangement, specific bars, with their own serial numbers, are set aside and held for you. They remain your property, and if the provider failed, they should be returned to you.
In an unallocated arrangement, you do not own any particular gold. The provider owes you a quantity of gold, and you are its creditor. If the provider failed, you would stand in line with its other creditors for what it owed you, much like the customers of the lending platforms in lesson 5.3, Celsius, Hodlnaut and Zipmex: yield from lending your coins, who found they were creditors rather than owners.
Many bank gold savings accounts are unallocated. The terms and conditions will say which kind yours is, sometimes in plain words and sometimes through phrases about the bank's obligation to deliver gold. If you cannot tell, ask the bank directly and keep the answer in writing.
Lesson 1.3 of How money works, What SDIC deposit insurance covers and what it does not, explained that the Deposit Insurance Scheme covers eligible Singapore dollar deposits. A gold savings account sits in your bank's app, next to your savings account, and shows a balance in grams and dollars. It is still not a deposit, so SDIC deposit insurance does not cover it.
That surprises people, because the account looks so similar to the ones that are covered. Banks in Singapore are tightly regulated and bank failures are rare, so this is not a reason to panic. It is a reason to know what you hold. With an unallocated gold savings account, your protection rests on the bank itself, with no insurance scheme behind it.
For Aisha, the comparison now covers cost, custody and protection together. The ETF has a yearly fee and trading costs, gold held for the fund by a custodian, and documents that set this out. The gold savings account has no yearly fee but a bank-set spread, usually an unallocated claim on the bank, and no deposit insurance. Which suits her depends on how much she holds, for how long and how often she trades, which lesson 6.4, Compare three ways to hold gold on cost, puts into numbers. Before then, read the actual documents for one of each, with these questions beside you.
Read the terms of one gold ETF and one bank gold savings account and note fees, spreads and whether the gold is allocated.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).