Gold as an emergency fund? Why cash has to come first

What an emergency fund is

An emergency fund is money set aside for the unexpected, such as losing your job, falling ill or a car breakdown, so that you don't have to borrow. In its Annual Report 2020, BNM says a good guide to a sufficient buffer is savings of three to six months of monthly expenses. Education material from the BNM Museum suggests at least six months, and ideally enough for a year.

PIDM notes that an emergency fund can help you avoid drastic steps such as taking money out of your retirement fund, borrowing from family, pawning your belongings or turning to unlicensed moneylenders.

Why cash comes first

The two most important features of an emergency fund are that it is quick to reach and that its value does not change on the day you need it. In its guide, PIDM asks you to consider how fast you can withdraw the money and how much you can withdraw. The options PIDM lists are a bank savings account, a fixed deposit account and an ASNB account, each with its own strengths and limits.

Eligible deposits at PIDM member banks, such as savings accounts and fixed deposits, are protected by deposit insurance up to RM250,000 per depositor per member bank. According to PIDM, gold-related investment products or accounts are not protected by PIDM.

Why gold is a poor fit for emergencies

• Selling back takes time. GAP gold can be sold to Public Gold on business days, minimum 1 gram. The money is credited to your bank account after confirmation: the next business day if confirmed before 4.00 pm, or within 2 business days if after that (GAP terms, clauses 3.1–3.5). An emergency at the weekend or before a public holiday may not be able to wait.
• There is a spread. The price at which Public Gold buys back is lower than the price you buy at, at the same moment. If you have to sell soon after buying, you will most likely receive less than you paid. See how to read prices and spread.
• The price can fall. Emergencies don't pick their timing. If one happens when the gold price is low, you have to sell at that price.
• Not a deposit. The GAP terms state that GAP is not a financial product or a deposit (clause 1.2).

A safer order of steps

1. Work out your essential monthly spending: rent or instalments, food, utilities, transport and fixed commitments.
2. Build a cash emergency fund up to your target, in an account that is easy to withdraw from.
3. Clear high-interest debt. BNM Museum education material advises paying all debts and, if you can't, prioritising those with higher interest rates.
4. Only then consider gold as part of your long-term savings, using spare money you won't need soon.

Where gold can fit

Once your cash emergency fund is in place, some people choose to hold part of their long-term savings in gold as a form of diversification. BNM itself lists "diversify your investment portfolio to reduce risk" among its tips for prudent money management. In this role, gold is savings you don't plan to touch soon, not money for next week's hospital bill. There is no gold allocation percentage that suits everyone.

Risks and costs

• Price risk: the value of gold goes up and down. Public Gold's terms state there is no guarantee that buying precious metals will yield a profit, and losses can happen.
• Spread: the difference between the buying and buy-back price at the same moment.
• Payment timing: sale proceeds are credited after confirmation, on business days (clause 3.5).
• Cancellation charges: may apply if you cancel a buy or sell instruction after placing it (clauses 1.17 and 3.7).
• Gold Premium: charged if you withdraw physical gold (clause 2.3).
• No PIDM protection for gold-related products or accounts.
• Terms can change: Public Gold may amend its terms without prior notice (clause 1.6). Check the latest terms.

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