You will calculate the five-year cost of holding the same value of gold three different ways.
Aisha has decided that if she holds gold at all, it will be about S$5,000, and she will hold it for around five years. She has three options open to her: a bar from a dealer, a gold ETF through her brokerage account, or her bank's gold savings account. Each has a different mix of costs, some paid once and some paid every year, and the cheapest-looking option on day one is not always the cheapest after five years. This exercise puts all three on one page.
Allow about 25 minutes. Set up a sheet with one column for each route and rows for every cost, then two extra rows for custody and liquidity.
Three rules keep the comparison fair.
First, use S$5,000 as the amount for every route, so the totals are directly comparable.
Second, assume the gold price is exactly the same at the end of five years as at the start. That sounds unrealistic, and it is, but it is the point. If gold rises or falls, it does so for all three routes alike. Holding the price still leaves cost as the only difference between them.
Third, include every cost along the way: spreads, commissions, expense ratios, storage fees and currency conversion where it applies. Missing one is the usual way these comparisons go wrong.
Every figure below is made up for the example. Real spreads, fees and expense ratios differ between providers and change over time, so your own comparison must use the numbers you collect.
Route one is a physical bar. Suppose the dealer's round-trip spread is 3%, as in the first example in lesson 6.2, Physical gold: bars, coins, storage and spreads. On S$5,000, the spread costs S$150. The product qualifies as investment precious metal, so no GST applies. If Aisha keeps the bar at home, there is no storage fee, and the five-year cost is S$150, though she carries the theft risk herself. If she pays a vault S$100 a year, storage adds S$500, and the five-year cost is S$650.
Route two is a gold ETF trading in US dollars. Suppose converting Singapore dollars costs 0.5% each way, commission is S$10 each time she buys or sells, the bid-ask spread costs 0.1% for the round trip, and the expense ratio is 0.40% a year. Working through it in order:
Converting S$5,000 to US dollars costs S$25. Buying costs S$10 in commission. The bid-ask spread costs about S$5. Five years of a 0.40% expense ratio, charged each year on what is left, costs about S$98. Selling costs another S$10 in commission. Converting the proceeds back to Singapore dollars costs about S$24.
The total is about S$173 over five years.
Route three is a gold savings account. Suppose the bank's spread between its selling and buying prices is 5%, and there is no yearly fee. The whole cost is the spread: 5% of S$5,000, or S$250.
Ranked by five-year cost on these made-up figures, the bar kept at home comes first at S$150, the ETF second at about S$173, the gold savings account third at S$250, and the bar in a vault last at S$650.
Look at what drives each total. The bar and the savings account are dominated by a one-off spread, so their cost barely changes whether Aisha holds for one year or ten, except for vault fees. The ETF's cost is mostly the yearly expense ratio, so it grows the longer she holds. Over a much longer period, its ranking could change. With a much smaller amount, fixed commissions would weigh more heavily on the ETF. Run your own numbers for your own amount and holding period instead of borrowing a ranking.
Notice too how much the vault fee changes the picture for the bar. Storage is easy to leave out when you are standing in a dealer's shop, and over five years it was the largest single cost in the whole comparison.
Cost is only one column. Add two more rows.
For custody, write who holds the gold and on what terms. The bar at home is yours, held by you, with all the theft risk. A vault may hold it allocated in your name or pooled with other customers' gold. The physically backed ETF holds gold through a custodian for the fund. The gold savings account is often an unallocated claim on the bank, with no SDIC cover, as lesson 6.3, Gold ETFs and gold savings accounts, explained.
For liquidity, write how fast you could turn each into cash. The ETF can be sold during market hours, with the money settling in the brokerage account in a few days. The savings account can usually be sold back to the bank in its app during trading hours. The bar has to be taken to a dealer, possibly tested, and sold in person. Lesson 5.3 of How money works, Liquidity: how fast you can get the cash without losing value, gives you the language for this row.
Three columns, one per route, with every cost listed and a five-year total at the bottom, followed by custody and liquidity rows and a ranking by cost. Under the table, a line or two on which route you would choose, if any, and whether custody or liquidity changes the order that cost alone gives you. Collect the real spreads, fees and expense ratio first, from the providers' own pages, and then build the table.
Complete the gold cost comparison for physical bars, a gold ETF and a gold savings account, and rank them by five-year cost.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).