Saturday, 30 May 2020

If I have excess 100K now, how should I invest over the next one year?

If I have excess 100K, how should I invest over the next one year or so? This is assuming I already have consider all factors such as emergency funds and personal expenses to be taken care of and have decided not to pay down your mortgage. This excess 100K is the amount in the worst case scenario even if I lose all of it, my livelihood will NOT be affected, with the exception that I will be emotionally sad because I am 100K poorer.


In the midst of the uncertainty and volatility in the stock market, it is wise to set aside at least 30-40% or 30-40k cash out of the 100K. This cash is called opportunity cash. Some call it “warchest”. This fund will be deployed into the purchasing of shares progressively, in each event when market tanked drastically over the period of next one year or so.

The downside of sitting with huge cash is of course low return. Nonetheless, ask yourself?  In times of uncertainty and crisis like now, do you prefer to be in a position where you have a good cash position or bad cash position? Cash is undoubtedly king during crisis.  


For investors, it is a dilemma to decide if we should invest now or to wait for market to dip further down?

Wall street has been rallying for the last two months with Dow surging from its bottom of 18k+ from end March to 25k+ today. An increase of more than 30%.

My sentiment is that we should continue to buy shares, but in a progressively manner.

The reason is because no one knows what will happen to the stock market tomorrow. Hence, we should not time the stock market exactly when it will hit bottom before deploying all in? Also, if you do not own any shares now, what if “Mr. Market” decide to go against logic and NOT retesting bottom, but continue to rally?  Then your zero ownerships of shares will have no capital gains.

For instance, the central banks pump in more liquidity, follows by the uncovering of a vaccine. In situation like this, the market will be invigorated to find new high.

While buying shares is important, what is more important is to learn how to find good shares at reasonable pricing fortified with sound long term future. The topic of stock selection is a big topic and we shall keep it separate from this article.

Limit 20-30K of the portfolio to shares investment. I emphasize that you should not impulsively invest all at once this 20-30%. Instead, invest prudently and progressively, or monthly (i.e. similar to Dollar Cost Averaging). And perhaps it is also a good idea to keep replenish this basket of fund each month when you have excess monies.

If you invest in this manner, you are protected on both sides. For instance, if market rises and never look back, you will benefit with your equity portfolio, which will have risen. If the market plunges, you still have funds to deploy to buy low each month. And lest us forget that you still have your opportunity cash mentioned earlier to take advantage of the stock market low.


Bonds are basically debts of companies or countries. S’pore government bonds are SGS or SSB, but I do not recommend you to buy now! This is because the yield is very low now. The average 10-year SSB yield is lower than 1.5% now and normally the front years are generally even lower than.

Therefore, you must well keep money in the bank for which several banks offer higher yield in various combinations. I owned SSB myself but it was bought during initial years of inception and carries >2.5% yield.

My suggestion is to peek into low risk, high credit rating corporate bonds. You can decide to immediately plough in 10-20% into these bonds. There is very low risk of you losing your capital with guaranteed yield p.a. if you decide to only redeem upon maturity. That is assuming that the company remain sound financially.

Sound corporate bonds
Capitaland and Frasers offers these bonds. For instance, CapitaMall Trust’s CapMallTrb3.08%210220 and Frasers Property’s FPTreab3.65%220522, with yield of 3.08% and 3.65% respectively.  Note that the security name describes the bond itself. CapMall Trb is with 3.08% yield p.a., expires year 2021, 20th of Feb.

High return, high risk (vice versa)
There are also higher yield corporate bonds such as Aspial, Oxley or Perennial with all have more than 4.5% yield. If you have higher risk appetite, you can consider these higher yield bonds, but bearing in mind that higher returns equal higher risks.

There are also ABF Singapore Bond Index which is an ETF with annualized return of 2%. It comprises of a basket of debts issued by Singapore companies such as HDB, LTA, Temasek etc. It is low risk with AAA credit ratings.

Junk bond risks
Do bear in mind that corporate bonds or bond ETFs are traded in stock exchanges and there are possibilities of not able to redeem at par value before maturity. For example, in situation of stock market crash where companies are affected financially, then their security will trade below par value. Some ill-fated companies can be completely overwhelmed by the financial crisis and enter into bankruptcy or judicial management. This can mean total loss of capital. For e.g. the recent Hyflux case and several oil and gas companies such as Ezra and Swiber during the oil crisis 4-5 years ago. Therefore do exercise caution.


To me, it is imperative to own Gold or Silver or both. This is in view of the high global currency debts of today. 20-25% of precious metals should be included in your portfolio. Gold and silver “normally” go in opposite direction with the equity stock market and this provides hedging to your portfolio.

For e.g. stock market enters extreme bear and your gold or silver enters into extreme bull. Then you can consider to take profit from your precious metals by selling them at high prices. And using the profits then to buy into the cheaper shares. PS: allow me to emphasize “normally” because in exceptional events, price of stock market and precious metals may NOT have inverse relationships.  

For gold, you may want to enter into a smaller position now, because price is at all-time high (>USD 1.7K /oz). However silver price is still affordable (USD 18-19 /oz) and the high Gold-Silver-ratio favours the buying of silver.

Paper Gold and Silver
You can either buy paper gold such as SPDR Gold trust GLD traded in SGX or open a Gold and Silver accounts in UOB.

Physical Gold and Silver
Alternatively, you can buy physical precious metals from companies in Singapore such as Silver Bullion, Bullion Star or UOB. Refer to my previous article, “Buying Gold from UOB Bank.”

Note that now physical metals are more expensive.  My advice is to keep 50-50 paper and physical. To know more about precious metals, refer to below articles:  


Lastly, you can also channel 0-5% of your portfolio into cryptocurrency to take a chance that this technology can potentially replace centralised-controlled currency one day? Two of the most popular are Bitcoin (BTC) and Ethereum (ETH). BTC is currently at USD 9K and ETH 230 per coin.


Recommendation only 
  • Cash 30-40%
  • Shares 20-30%
  • Bonds 10-20%
  • Metals 20-25%
  • Crypto 0-5%

Strictly Example only:
Cash 35K; Bonds 15K; Progressive monitoring: Shares 25K; Metals 20; Cryto 5K
  • Frasers corporate bond – buy 15K
  • BTC – buy 3K. balance 2K
  • Gold – buy 3K gold. Buy 6K silver. balance 11K
  • Shares – buy 3K each month… June, July etc. 

Total buy in June – 30K….Cumulative in July – 36K….. Aug 39K…. assuming no sudden correction of pricing in stocks, metals, etc.

Friday, 29 May 2020

Rolf’s ANALYSIS to help you decide to INVEST or pay down MORTGAGE first?

Should we quickly pay down our house mortgage with all our excess monies less expenses, or keep should we use our extra income to invest?

Before we start, let us do a simple mortgage analysis.

Assuming 2% interest p.a. on average, below is a table depicting different loan amounts with varying loan periods of 30, 25, 20, 15 years to show what is the total interest payable and the monthly instalments.


Mortgage Service Ratio
In the above table, you can see the Mortgage Service Ratio (MSR) which is defined as the ratio of monthly instalment to household income, kept at 30%.

Currently, the Singapore government set the Total Debt Service Ratio (TDSR) limit at 60% which means all your debt obligations (student loans, credit card debts, car loans, personal loans, and so on), cannot exceed 60% of your income. This applies to property loans granted by all financial institutions (not just banks).

However, I feel that hitting the 60% TDSR limit can be too risky especially in times of crisis where income sustainability is at stake. I recommend to keep MSR comfortably at 30%, so that you still have 70% of the savings to pay off car loan (if any), and potentially savings also for investments.

My very own MSR is even more conservative at 15% average for the past many years. This is due to my high expenses in a big household and also my preference to have more liquidity to invest, to potentially set-up business when opportunities arise, to use as emergency etc.

Absolute interest payable
Another criterion is to consider absolute value of total interest payable. It is wise to keep it within SGD 150K, otherwise you will be paying just too much interest over the period of your tenure.  I think SGD 200K is the maximum you should go for even with a higher property loan.

Unless, it is very clear that you are going to sell your property for a significant profit within a certain period of time. But nobody knows! I have known many friends and relatives who took on big property loan with more than 20 years loan. Often times when I quipped if they are then paying too much interest, most will say “its ok” because I am going to sell it for a good profit after 5 years. Then you will realise that most of them only have one property or they have not been able to sell after 5 years.

In fact, I met with most who lost a lot of money after some unforeseen circumstances take place. E.g. divorce, retrenchment or big pay cut making their re-financing more difficult, such that they have to endure a higher interest rate on the 3rd year interest rate onwards.

Per annum interest payable
It is important to pay more than 50% of your monthly payment on principle and not more than 50% on interest. Hence, I am suggesting to have interest below SGD 10K per annum on average. The reasoning is because at SGD 10K yearly interest, is equal to SGD 900 per month of interest, and assuming monthly instalment is SGD 2,000 plus, then at the very least you are still paying more than 50% of the principal.

Recommended mortgage  
Using these criteria and referring to the above table, the highlighted green figures are the recommended mortgage variables.

Of course, if you have higher household income, or excess savings or bonuses in those years, then upon refinancing your loan (every two years), you can either shortened the loan period, or you can pay down a fix lumpsum to reduce the loan amount significantly. Both ways, can help you to reduce the overall interest payments, as long as you are comfortable.


Fulfilling the above criteria, then I suggest that you should definitely invest with the rest of your savings. 

However, before you invest, you need to learn more about investments. This is of utmost importance. It will take time and patience. Above all, you may have to pay school fees and remember DO NOT BE TOO PROUD if you find quick success during the start of your investment journey. Most of the time, you are just fool by randomness during the beginning. It is not because you are skilful. It is likely market is just too bullish or you are pure lucky, or you probably have not experience or anticipate any crisis yet in your life! That said, once you have your experiences of hardwork, "pain-learn-improve",  you should be able to beat the market over time. 

If you do not have humility, time or patience to learn investments or to learn how to manage a portfolio, I suggest you should not invest by just hearsay and pick stocks sentimentally. It is much better to just pick a low risk fund or a bond and to put in money monthly and not to be bother about the market movements. Alternatively, your CPF may give you better compounded returns.

I know friends in their late 50s who are not overly engross in learning investment as they focus on their career to increase their income and sitting at management position. They then invested in funds with their insurance agents for more than 20-30 years and today, and the return on those funds today is able to help them with retirement and to fund all his children for universities.


Low interest rate in Singapore
As you probably know, interest rate of housing loan in Singapore has been very low below 2% for the last ten years. In comparison to the rest of the world, home loan here is one of the lowest. In USA, fixed interest rate for 30 year-old loan can be as high as more than 3.5%. China and the rest of the South East Asia have more than 4-5% mortgage rate on average in the last ten years.

Taking advantage of economic health’s direct proportional relationship to interest rate
In fact, if you try to refinance every two years in the last 10 years like I did, all my rates are below 2%, and in fact even below 1% at one time.

Also, if interest rate rise in times of good economy with job security and your investments is doing well, you can cash out investments or use your increased bonuses to pay down mortgage lumpsum or shortened the loan period during refinancing.

If economy is not good, generally interest rate will be low, then you can use your excess monies (because you did not pay down your mortgage aggressively), to buy stocks during times when stock prices are depressed.

However, take note that interest rate may not be always be directly proportional to economic health.

HDB Loan and Singapore government is “sympathetic”
If you are taking HDB loan, although rates are generally higher say c. 2.5%, but our government is more forgiving and will not chase you out of the house even if you default. When I was young, I had seen my neighbor default for many months rental, instead of HDB chasing them out of the house, they will send social worker to their house to talk to them and help them to find jobs.

Singapore is also generally quite sympathetic in times of crisis when you lose your job and unable to pay your mortgage. This covid pandemic is the best example when government dictate banks to allow for deferment of mortgage payments.

Emergency savings
If you use all your excess monies to pay down mortgage, then you will not have emergency savings during times of crisis. Equally bad is when you use all your excess savings to buy stocks instead of mortgage. Then in times of crisis when market is depressed, your stocks portfolio will drop significantly. And let’s say you need emergency money and need to cash out your stocks, you will make huge losses.

Hence it is better to keep emergency savings in cash or in bonds which is considered very safe which can be easily liquidated and yet with percentage returns.

Otherwise you can have gold and silver to hedge against times of crisis, like what I do. So that if stock market crash, and gold price rise, you can then sell your gold at high price and use the profits to either buy stock cheaply or to help you for emergency needs during economic crisis like now.


Of course, there are other factors to consider in relation to your own income and expenses to decide how much you should pay down your mortgage and how much you should invest.

It differs from household to household. Some household have family to take care of, some don’t. Some has more security in their jobs. Some are willing to work until they are old, therefore they can have lower monthly instalments for mortgage repayments, and have more money for investment portfolio.


If you are in Singapore owning a Singapore property, my advice is don’t cripple your cash reserves on the quest to be mortgage-free. It is not that smart in a low interest rate environment.

However, if you really seriously have zero interest in investment knowledge, and you are very risk adverse, then you can quickly pay down your mortgage, but remember to have at least one year of emergency savings on expenses. I am more “kiasu” and advise to have 1.5 years of liquidable emergency savings.

Finally, it is not wise to pour all your money and savings in stocks alone. It is better to have an investment portfolio comprising of stocks, bonds, precious metals, cash etc. This can help you to hedge against economic crisis when stock market crash. And if it just happen that you need emergency cash because you are being retrenched or there is a double whammy economic and personal health crisis, then, at least the downside or the black swan event is avoided.

Monday, 25 May 2020

Impact to Singapore and Rest of World? US new passed bill to delist some Chinese companies in US stock exchanges!

Last week US senate passed a bill to potentially delist Chinese companies from American stock exchange if these companies do not comply with the “Holding Foreign Companies Accountable Act” for three consecutive years.  

The Public Company Accounting Oversight Board’s (PCAOB) will enact the act to ensure audits of foreign US listed firms to be accurate and transparent. These firms are also require to declare if they are owned or controlled by a foreign government, including China’s communist government.

As it stand now, Chinese government refuses to allow PCAOB in inspect audits of companies that are registered in China and Hong Kong. The recent delisting of Chinese company Luckin coffee whose fraudulent accounting came to light is one of the triggering factors. But more evidently, it is US targeting China in their ongoing trade wars.

According to SEC, more than 224 foreign US-listed companies, mostly Chinese with a market cap of > USD1.8 trillion will have trouble adhering to PCAOB’s audits.


Shares volatility persists
Short term impact will see shares of Chinese-US listed companies taking a hit.
Hang Seng will not do well too, as already seen with last Friday’s more than 5% decline in the index.
The pandemic and US-China tensions are double whammy. Volatility in stocks will continue.

Listings elsewhere
It is likely that companies listed in US such as Alibaba, Baidu, choose to leave U.S to seek listing in Hong Kong. Alibaba already had secondary listing in HK while Baidu also expressed willingness to do the same earlier.  If not HK, then perhaps London Stock Exchange?

Otherwise, in Shanghai or Shenzhen stock exchanges but with smaller pool of investors.

Alternatively, Singapore should really lure some of the bigger cap Chinese companies to list here. However there are still much work to be done as S-Chips listings in SGX is not really a success with poor track records in the past.


It is without doubt that China will potentially over-take US to be the largest economy in the world one day. That said, it will take STILL some time for that to take place. Maybe at least 20 years?

While US may have poor governance in its leadership of the country, the corporate America is still far too powerful with so many gigantic companies, and many having technology that will shape our future lives.

At this moment in time, US just have too many “weapons” against China. Add taxes, since China is net exporter to US! Delist Chinese firms in US! Print more USD! Getting Europe allies and other allies such as South Korea, Japan, Taiwan, Australia to have sanction against China.  

In the midst of the Hong Kong protest, US will also step in to impose security and democratic laws against Chinese sovereignty over Hong Kong.


Stocks can rally, but people will lose their jobs or have income decline
This crisis will not be like the previous ones where it tank and recover fast. It is going to be a long winter. While the stock market is rallying, it is nothing to do with the real economy. Stock market is driven by liquidity of fund managers and their sentiments to make money. It does not reflect the economy.

The economic problems of the world will result in a small and painful decline of global economies. Jobs and income will be impacted, even without the corona pandemic, as the false optimisms in the last decade cause by money printing will soon come to an halt, as STEROIDS begin to show its side effects.

Widening of Income Gap
The global rich and middle income gap will widen. More middle-income will fall into the zone of low income. The rich and the politicians will continue to be richer and more powerful. The people authorizing and those who sell the steroids will continue to earn more money in the near term (Rich and powerful). The people at the receiving end of the steroids (middle and low income) are going to be the one who suffer.

Protest to redistribute wealth
Very soon, there will be more protests in the world held by the disgruntled. The “have not” will protest against the “haves” to redistribute wealth.

Whether there will be a successful redistribution, I am not sure. The last time in 1930s, it produces Hitler.

Singapore hope in ASEAN!
Our over-reliant on good US-China relationships to grow our economy is not going to work anymore, at least for the short term. ASEAN is our only hope now! ASEAN need to be united as one, and Singapore can help those economies to grow with our knowledge and strong banking systems.

And the country which will grow the fastest next is VIETNAM! Due to the tension in US-China that will persist for awhile, more firms will think and explore relocation of their investments into Vietnam.

In the long run, say 10 years or more, China will continue to grow and grow. But for now, they have been growing too fast in the last few decades and every fast growth will soon meet with decline.

Nonetheless, the future of China is bright. They will learn from this crisis, and continue to grow resilience to deal with global problems, by strengthening and keep on strengthening their own economy.

Stock investing
Personally I prefer to be at the side-lines for now, although I am still confident that China and her Chinese tech firms have huge growth potential. Waiting for their share price to tank further now, before taking any actions.

Saturday, 23 May 2020

Which Singapore universities (NUS, NTU or SMU) courses should you choose for your children?

More than 20 years ago I was met with the decision of which universities and courses to choose from. I have no adviser since my mum is a widow with no education and none of my siblings have any University experiences back then. Most of my relatives were not highly educated too.

I have to make the decision by myself.

My childhood dream is either to be a Lawyer or an Engineer. English was never my forte, so the easy choice is to become an Engineer. This was further fortified by my proficiency in Math and Science leading to the relevance of my A level subjects, Math, Physics and Economics. So just like that, I was enrolled into common Engineering in Nanyang Technological University without much consideration into what my future career will be like! There are no real mentors to give me the wise guidance I badly needed back then.

That said, I was already lucky enough to at least know what I want to be when I graduate. It is not just me making an important decision hastily. I have many friends graduated from Engineering but ended up starting their first job in the banking or car industry or as Air stewardesses. Another friend graduated with Bachelor of Arts in Math and Economics but started his first job as professional debt collector. I also remember that during my army times, a reservist also told me he studied psychology in National University of Singapore (NUS) but couldn’t find a job as a psychologist, but instead becoming a Librarian for many years.


To have a wise mentor before enrolment into university is of paramount importance.
I know some parents will say, “aiyah”.. whatever he or she like, I am ok!

That is ignorance in my opinion!

Not everyone is the cream of the crop that can excel in what he or she love. And not every child has the maturity to know what he or she like.

I am not discouraging passion seeking. But to be successful in your passion which will translate into sustainable career earnings, there must be a fair deal of prior hard work, sufferings and talent in a specific field, already at an early age comparatively. Then you can stand out from the rest.

For adult, please be wise to give the younger generation the right advice that could possibly shape their career forever.

In fact, it is very important to plan early when he or she is in upper secondary school, so that the admittance to JC or polytechnic will be coupled with the relevant courses as stepping stone into the selected university/courses.

If you are the child who is having a dilemma of which university or what courses to choose, please seek the right mentor who has the good track record in life and career to give you the much-needed guidance.

With that in mind, I have been very focused myself in preparation to become a good mentor for my children or the young people I love. I hope to provide them with the right mindset and ideology which will enable them to make the RIGHT CHOICE NOW, so that they will not regret when they reach adulthood.

And to be able to do that, I need to acquire life experiences and knowledge myself. And being able to balance between both extroversion and introversion i.e. Ambivert. Extroversion acts include travelling, meeting and working people of different cultures improving our inter-personal skills; dare to try and experiencing failure myself, so that I can pick up and improve. Introversion acts are reading and writing, and learning from web. For me, my work and my wide social circle gives me the outgoing exposure, while writing this blog, reading books, and learning finance, IOT, are few examples of my inward improvement. Being an ambivert who love learning is not so much for earning money, but more for wisdom to keep pace with life.


Recently I gave advice to my loved one for her to apply for Singapore Management University (SMU) School of Information Systems (SIS). This is despite her average A level results of ABC for 3 H2 subjects. When the offer of admission came, we were overjoyed and was certain that it was her outstanding performance in CCA and her well written (guided) testimony that help to make the cut.

Initially she opted NTU Info Engineering & Media (IEM) as her first choice, which I thought was really good, but after some research, I reckon SMU SIS is the better choice. Both SIS and IEM were four-year courses, but SMU SIS course fees were much more expensive costing close to SGD 50K comparing to NTU IEM ~ SGD 40K.

So why did I opt SMU even with the higher fees?

Broad-Based forward-thinking curriculum

SMU School of Information Systems (SIS) focus on courses with emerging future technologies, such as IOT, AI, Business Analytics, Smart City Management and Technology, Cybersecurity, Data Science, Digital Transformation, Fintech, Lawtech etc.

After doing some extensive research, I find that NTU IEM tend to be more lopsided towards technical and drives more into the details of design and technical, with more hardcore maths, engineering and computing courses etc.

On the contrary, SIS focus on programs that blend social, economic, business, environmental issues with technology to develop smart practical solutions such as state-of-the-art smart city initiatives.

In general, SMU is also young and dynamic university whose strengths lies in its broad-based yet specialised curriculum. Undergraduates are prepared for a wide variety of professions and industries through its multi-disciplinary and forward-thinking curriculum. Smaller classes also help in a more focus approach of learning with more wholistic brain storming, which I felt is more efficient than just wrecking the brain to solve complex problem sums. I went through that four years of intensity myself in NTU back then, which I felt is totally unnecessary.

Leadership + Entrepreneurship  = Commercial + Technical

SMU also give me the impression that the university focus on the development of soft skills more. To me, soft skills are undoubtedly more important than hardcore technical ability when you enter the real business world if you want to be a leader. For e.g. developing management, commercial, relationship building as well as presentation skills.

My wife told me that in her company, the fresh graduates from SMU tend to be more vocal and have better presentation and inter-personal skills than those from NTU or NUS.

Entrepreneurs or employees who have a mixture of commercial sense in business with technical background are often more successful in their career.

Steve Jobs and Bill Gates are more commercial minded rather than hardcore engineers. Amazon Jeff Bezos who has avid scientific interest since childhood and studied electrical engineering, also had career experiences in Banking as a product manager as well as Head of customer service in fintech sector. Last but not least, Jack Ma started his career as an English teacher and has no formal technical knowledge in IT. But he is clever enough to partner his friend who was a computer teacher.

Highest paid & better prospect

SMU SIS graduates earned the highest gross monthly salary with a median of SGD4,300 and a mean of SGD4549 compared to the national median figure of SGD3,600 among fresh graduates. Those with Cum Laude (distinction) earned a mean gross monthly salary of $5,212, and a median gross salary of $5,000. Law graduates were excluded. NTU IEM graduates median gross salary last year was SGD 4000 which was already in the higher bracket within NTU or NUS.

Furthermore 7 in 10 SMU graduates secure employment before graduation.


If you are parents with concern on your kids’ education,

Do not stop learning yourself to acquire knowledge of the latest technology that will have an impact on the future economy. Without enriching yourself, it’s not possible to give the right advice to the child. If you think you are not in a position to give good advice, seek someone who can! But it is better to do it yourself.

Do not leave the entire decision of university admission to the child alone. Be the someone your child respect. Listen to the child, ask questions, and teach them long term thinking and guide them to appreciate what is going to happen in the future.

Start early in the plans for the child’s future varsity admission by keeping abreast of universities’ courses and their developments. Choose relevant subjects in pre-university programs as stepping stone.

Following passion is important but needs further justification to assess practicality.

Choose a course that gives your child a holistic helicopter view. Having a commercial mindset with polished soft skills coupled with a technical background will give you higher chance of success.   

While cost is a concern, but paying that extra monies now to nurture a person’s future is worth it!

If you are the student,

Seek advice from several adults you respect who truly love you and display not only good conduct in life but also good track records in their career. Listen to their advices and digest and write the pros and cons of each courses after you research yourself on the web.

Never choose the university course just because your best friend or all the rest of your friends are all going there.

Do not just choose the course based on what you think or feel is your passion. At your age, it needs more justification on future practicality. Don’t try to lie to yourself.

Similarly, do not choose anything which you have zero interest even after doing all the research and listen to all the adult talks. If you were forced to go into a course which you hated so much, the future outcome will not be good either.

Last but not least, do not make hasty decisions based on emotions. Be true to yourself before making decision.

It is your own future, not others!

Thursday, 21 May 2020

Understand the divergence of Physical versus Paper precious metals? Where and how gold and silver is traded, and what determines its price.


London Bullion Market Association (LBMA) in UK is the largest over-the-counters (OTC) clearing house in the world. This is also called the spot market. OTC refers to trading usually done directly between two parties in an agreement and can be done electronically or by phone via broker-dealer network. There is no centralized stock exchange. Most OTC trades are cleared in London and the international gold price is derived here via daily gold auctions taking place twice a day, 10:30am and 3:00pm, where the LBMA will publish the gold price in US dollars.  LBMA also own and manage the good delivery lists for both gold and silver and has over 140 members such as banks, financial institutions, bullion dealers, miners, refiners, trading, vaulting, manufacturing companies over the world.

The Commodity Exchange Inc. (Comex) is the largest gold and silver derivatives (e.g. forwards, futures and options) exchange trading in the world owned and operated by CME. Comex allows traders to leverage position using futures. There are two kind of investors in Comex. One is the commercial hedgers which either really need the precious metals or buy the metals to hedge against inflation. The other type is the speculator, who tries to profit by speculating the future direction of the precious metals’ prices. And just like oil (refer to my recent article here), gold futures are physically delivered upon expiration. But to avoid storage and logistic costs, contracts are normally closed prior to delivery by the speculators.


Gold refineries are typically set up close to the bank of England to process the physical gold market in London. The Swiss Confederation is the world’s largest importer and exporter of gold. This is due to the mountainous terrain of Switzerland which provides a natural environment to excavate underground vaults for storage of gold. Furthermore, Switzerland has the largest concentration of gold refineries in the world. Swiss gold refineries account for more than 65% of annual gold refinery output.

During WW1 wealthy Europeans fearing tax hike relocated their gold holdings into Swiss accounts for storage to avoid taxation. It is also illegal for Swiss banks to disclose client information following the enactment of Swiss Banking Law in 1934. During WWII, UBS also maintained accounts for German Jewish businessmen and households. At the same time, they also collaborated with Nazi Germans by helping to store their gold and cash in the underground vault. And until 1990s, the three largest Swiss banks (UBS, SBC and Credit Suisse) maintained ownership stake in Swiss gold refinery. UBS and SBC merged in 1998 to form UBS AG.

The four giant refineries are Argor Hereaus SA, Valcambi, PAMP, and Metalor Technologies. The former 3 refiners due to its location are called the Golden Triangle of gold refineries. Interesting for Singapore readers, Valcambi is 100% owned by Global Gold Refineries Ltd, which in turn is 95% owned by REL Singapore Pte Ltd, and 5% by Rajesh Exports Limited in India. Rajesh Exports is also the 100% parent of REL Singapore, hence a controlling shareholder in Valcambi.


As explained earlier, the international gold price derived via auctions in LBMA in London.

Factors affecting the price
Gold price is closely related to interest rate. Central banks and IMF play important role as they hold the largest gold reserves, and lend and borrow gold.

It is generally accepted that if interest rates rise, gold price will fall. This is because gold earns no interest, and if interest rate rise, it is better to hold currency rather than gold. Conversely, if interest rate falls, gold price will rise. This is because gold is often seen as the true money with a store of value, while currency’s storage of value is dependent on the confidence of that particular currency. For e.g. Venezuela experienced hyperinflation in recent years, when there is no real demand and oversupply of its currency. It’s currency simply loss its value. Germany Weimar Republic in the 1920s is another notable case of hyperinflation.

That said, interest rate and gold price is not always inversely proportional. For e.g. during Apr 2011, ECB raised rate from 1% to 1.25%, the first since 2008 crisis, but gold price rose and hit new high. One of the possible reasons is that investors believed that rising of interest back then may puncture the balance sheet of smaller and weaker eurozone countries such as Portugal, Greece and Ireland leading to a collapse of Europe’s economy.

Therefore, gold price is affected by interest rate, macro-economic factors, and central bank’s monetary policies.


Gold like currencies is borrowed and lent by central banks in the interbank market. Because the interest rate of currencies in US is lower, this encourages gold borrowings from the US by the central banks. Gold bought in spot in UK will have to be converted to USD in USA, hence gold trading is somewhat similar to forex also. It is also somewhat similar to oil futures also and can be in contango when forward gold price is higher than spot price, and hence can be relatively liquid in derivatives market. However, it is not really dependent on demand and supply like most commodities but more dependent on the auction pricing people willing to pay. Gold can also be traded as ETF such as SDPR gold shares (GLD). Others are ETNs, CEFs, gold certificates or gold and silver accounts issued by banks etc.

Gold is generally traded on unallocated spot market in London and New York. I will explain what is unallocated market in the following section. Both markets are derivative markets and neither is connected to the physical gold market. In a sense, the physical gold price is actually the price taker from the paper market. Normally, when the paper spot price rise, the physical gold price will also rise. Vice versa. The price difference of paper gold and physical gold normally differs by a few dollars.


Allocated account in simpler term means physical allocated to a specific customer. Unallocated account is a more popular way of transactions though which means that transactions can be settled by credit or debits. And if there is a credit in an account, it does not mean that the creditor is entitled to specific physical gold or silver. Instead these credits are backed by a general stock of precious metal with whom the account is held.

In other words, if you trade on unallocated account, your holdings of 10 oz of gold on paper does not mean that there is 10 oz of physical gold stored somewhere.

Perhaps if there is 10,000 tonnes of paper gold in unallocated credit account, in reality there may only have 1,000 tonnes (arbitrary) of gold backing these unallocated credit account. Essentially, they operates like a bank with a fractional reserve system. So what exactly is the ratio of Paper Gold versus the real physical gold stored in vault? We have no idea. The LBMA and its members provides no information on this fractional ratio!

Therefore if there is a “bank-run” scenario in the LBMA, that is all the Creditors requested for the delivery of the gold at the same time, the Bullion Market will crash. And it is likely that the creditor of the unallocated account of gold will not be able to retrieve any of the precious metals he/she owns.


As of end March, there is a huge divergence of London spot (Physical) and Comex (Paper) contracts, with a spread of over USD100 from the usual few dollars. Bullion banks maintain long on London spot and short on COMEX futures. I will explain why Bullion banks have this position later. When price of paper gold rises, Bullion banks have to cover their huge shorts positions losing a lot of money. The paper gold “bought” transactions drove up and the physical gold to back that paper gold is unable to keep up, hence causing a wide divergence of physical and paper gold.

Corona Pandemic
Many blamed the covid-19 pandemic when countries shut borders and grounded planes which limits the movement of physical gold from London to New York. Also, the refineries were short of capacity to meet the delivery of New York demand which are typically in the forms of 100 oz bar for standard COMEX gold futures. The physical gold stored in London are often in the form of 400 oz bars. As the pandemic struck with social distancing, the refineries in Europe are unable to produce the 100 oz bar in time to be delivered to US.

Lack of Physical gold to back paper gold
However, the main problem of the physical precious metals crunch is really due to the unallocated gold or gold credit or swaps which bullion bank issues through its fractional reserves system. This means that there is a lack of physical gold to back the paper gold traded.

Many countries stored their gold deposits with the Bank of England (BOE). These gold stored are used as a collateral against currency loans or can be redeemed/sold especially in a rising gold price environment. Just this week, Venezuelan government has been asking BOE to sell 31 tonnes of the gold worth more than 1 billion euros, but are met with loads of excuses from BOE to stop the sale of gold. Perhaps the reserves of Gold in BOE is getting low and they are worried of a “gold bank run”.

In the late 1960s, France President Charles de Gaulle soon realized that USA do not have gold to back the dollars. France asked for their gold and from USA in exchange of the dollars back to USA. Soon other countries follow suit. This resulted in a bank run on gold for USA in which she lost 50% of its gold from 1959 to 1971.

Fearing that US will eventually run out of gold and go bankrupt, U.S. President Richard Nixon ended international convertibility of the U.S. dollar to gold on 15 Aug 1971.

The world’s largest gold-backed ETF is SPDR Gold Trust (GLD) in which HSBC in London is the vault custodian. With the increasing paper gold demand in Mar-Apr this year, HSBC vault saw a massive inflow of 175 tonnes of gold bars with a holding of 1083 tonnes. The inflow of gold to HSBC vault coincides the period when HSBC revealed that it saw $200million single day loss because of the widening of the spot and derivative spread.

The question really is where does the additional 175 tonnes of gold came from? As of end April this year, HSBC has 46 tonnes of gold that was held in sub-custodian vault with BOE. It is highly possible that in the month of April, HSBC used the 46 tonnes of gold stored with BOE to add to the SPDR Gold Trust, instead of using gold at its own HSBC commercial London vault.

We ponder if there is really sufficient physical gold in HSBC vault in London to back the SPDR Gold Trust?  


There are many reasons, but one reason I can think of is because I assume Bullion banks in London are net lenders in general especially to the US COMEX market. And bullion banks work on the basis of fractional gold reserve system to earn an interest out of the lending.

In the event that interest fall, gold price tends to rise. The bullion banks will loss on their interest earnings. But because they are long on spot, the earnings from the rise of gold price can offset their losses in interest. Likewise, if interest rise, gold price tends to fall. Bullion can then earn higher interest on their spot lending and at the same time, they will earn in their shorted futures contracts. Both directions of interest and gold price, bullion banks are hedged!

Correct me if I am wrong in my explanation.

Other reasons of the long spot, short futures are as a result of Bullion banks being proprietary traders, as well as their role as financial intermediary for various gold market participants, such as gold miners, central banks, refiners, fabricators, hedge funds etc.  


Why Deflation, QE, Helicopter Money, then Inflation, Hyperinflation then Depression?