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How will the Autumn Statement affect investments in gold?

So was it a golden Autumn Statement or more a wintry outlook in terms of investments? How might investments in gold combat the chancellor’s policies?

On Wednesday 23rd November, Philip Hammond delivered his first and last Autumn Statement, having decided to restructure the timetable of financial statements in the future.

Uncertainty

The Chancellor’s speech certainly opened with positive news; the Government borrowed £4.8bn less than expected in October. The IMF had also confirmed that the UK would be the fastest-growing major developed economy in the world this year and had demonstrated its resilience against recession despite the vote to leave the EU.


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Nevertheless, there is still a ‘black hole’ in the nation’s finances with estimates of the amount needed to fill it ranging from £25bn to £100bn. In total, growth would be 2.4% lower because of the uncertainty caused by Brexit and Mr Hammond admitted that the forecast carried a ‘higher degree of uncertainty’ than previously.

Uncertainty is always a driving force for the gold price. While, as with any stocks and shares, the gold price will inevitably go up and down, it has been demonstrated over time that it remains a safe haven and ‘inflation-proof’. As a tangible asset, gold is a solid investment that you can pass to the next generation without it eroding in value.

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Investments in gold as a Tax Efficient Saving method

The Chancellor also announced an increase in the tax-free personal allowance to £11,500 and the higher rate threshold to £45,000. There was good news for savers with the announcement of a new bond through National Savings and Investments, with a fixed return of 2.2% for three years, limited to a maximum investment of £3,000 initially. While these are all welcome, the National Institute of Economic and Social Research (NIESR) has predicted that tax rises will almost certainly be needed to plug the gap in the deficit. All this highlights that gold remains a tax efficient way of saving with UK gold coins being VAT exempt and Capital Gains Tax free.

In terms of pensions, post-withdrawal contributions have been reduced from £10,000 to £4,000 annually to clamp down on those seeking ‘double tax relief.’ This affects over 55s who used George Osborne’s ‘pensions freedom’ to take cash from pension pots. With up to 45% income tax relief on SIPP investments in gold, pension gold is a sensible course of action to consider.

As predicted, the Chancellor stated that

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investment in infrastructure would rise from its current 0.8% of GDP to between 1% and 1.2% from 2020 and confirmed an extra £1.3bn for the nation’s roads. There may not be plans to pave the streets with gold but this is certainly a much needed and welcome initiative!

Next Year

So what of the future? 2017 promises to be every bit as uncertain as 2016 has been. Brexit is on the horizon, President-Elect Trump will be sworn into office on 20th January and there will be elections in France and Germany. All these are likely to make the markets jittery. So while the Statement did not make specific reference to precious metals, maybe it’s worth considering adding gold and silver to add balance to your portfolio in these potentially volatile times and in time for next year’s Budget in March (before it moves to being merely a Spring statement!).

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Trump Is Not Affecting Gold As An Investment

14 Nov 2016seeking-alpha

Summary

  • A Trump victory has been touted as a bullish sign for gold.
  • The share performance of GLD does not bear this out.
  • The Federal Reserve will have more bearing on GLD going forward.

The surprising victory of Donald J. Trump in the 2016 Presidential election over Hillary Clinton has generated plenty of speculation about what the next four years portend. For the World Gold Council, it is a bullish sign for gold. To quote the council’s global head of investment research, Juan Carlos Artigas:

Gold is the only de-facto currency that cannot be debased by printing more of it, and the only one that does not carry political risk. There is a reason why gold has outperformed every major currency throughout history.

The share price performance of the SPDR Gold Shares Trust (NYSEARCA:GLD) contradicts Mr. Artigas’ analysis.

SPDR Gold Shares Trust

The SPDR Gold Shares Trust is the world’s largest physically supported gold exchange-traded fund. According to the fund’s website, it holds $37 billion worth of gold assets, 934.56 tonnes and 30,047,142.09 ounces. Its market performance, therefore, is a telling indicator of gold’s value. And at $1,233 per ounce, gold is now at its lowest point since June.

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Why has the price of gold dropped in the wake of Trump’s victory? Frankly, I do not believe that the outcome of the Presidential election has had much to do with gold’s performance. Precious metals in general have been in correction since the summer, and it seems the bottom has yet to be hit. A more pertinent factor affecting the price of gold is the potential for an interest rate hike when the Federal Reserve meet on December 14th.

Low interest rates make gold more attractive because there is no yield as there is with bonds or bond funds. Consequently, the only benefit that gold investors derive is capital appreciation. If there is an interest rate hike in December, as is expected, that will impact gold’s share price. This means that an attractive entry point for gold investors is being provided now, and may well be more attractive going forward.

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Will the world’s gold supply ever run out?

gold supply

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It may feel like gold has always been around, after all the Aztecs and the Egyptians produced a fair amount of gold supply for a very long time and it’s said that the first gold coins were minted around 550BC. However, Gold artefacts like the Bronze Age Ringlemere Cup, dated around 1600 BC, were discovered in Kent in 2001 – suggesting a thriving gold industry throughout ancient Britain.

For thousands of years, gold has been globally cherished as the most precious of metals but gold is a finite resource. In fact, Warren Buffett, one of the world’s most renowned investors, estimates that the total amount of gold mined in the world so far could fit into a cube with sides of just 20m (67ft).


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With an increase in demand, a downward trend in new gold discoveries and an increasing number of years for them to become operational, is there a real possibility that demand may, one day, outstrip supply?

 

No physical gold supply

Recently, we saw headlines of, ‘lines around the block to buy gold in London‘ and, ‘banks placing unusually large orders for physical gold’, as institutional investors were seen to be rushing to buy it again, fearing the world was on the brink of another financial crash. This was especially true in light of some central banks moving toward negative interest rates, the US dollar weakening and the lack of alternative investments.

Central bank demand, as well as Chinese investors (seeking protection from their own weakening currency), contributed towards the increased demand for gold – exacerbating the likelihood of a shortage.

One such example of this happened in Germany recently, with a very real lack of physical gold. Xetra-Gold, a bond on the Deutsche Borse commodities market, claims that every virtual gram of gold is backed by the same amount of physical gold, yet clients were recently refused the precious metal, due to ‘business policy.’

Similarly, Deutsche Bank experienced troubles with delivering even small amounts of gold to retail clients, all of which could be signals indicating that a global physical gold shortage is possible. The way to avoid such a risk is to consider physical gold versus electronic gold.

Dwindling new gold supply

Mining.com gives supporting figures for the low gold supply; looking at the past twenty years, exploration spending for gold peaked in 2012 when mining companies spent a total of US$6.05 billion. This yielded only four major gold deposits being discovered, compared to an average of ten per year leading up to 2012.

Whilst any major gold discovery could be heralded as significant, the time it takes to bring a deposit into production is increasing significantly. Such discoveries are now expected to take an average of 19.5 years from discovery to production, due to increased legalities and more socially acceptable infrastructures.

At the same time, China, Russia and India are currently buying tons of gold as it becomes increasingly attractive as an alternative to reserve currencies. According to the IMF, China bought monthly amounts of around 11 tons in January to April 2016 and Russia registered 14 tons a month, between January and June 2016. And for the trading week ending on 6th November last year, 45 tons of gold was withdrawn out of the Shanghai Gold Exchange (SGE) vaults – which is the equivalent of the total wholesale gold demand in China.

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A US Geological Survey estimated there to be around 52,000 tonnes of mineable gold still in the ground, but when you factor in the lack of recent discoveries and the increased production time; for the individual, private buyer of gold, the above situation is largely good news. For many, the potential lack of supply may suggest similarities between gold investment and buying property.

In summary, the natural mechanics of supply and demand mean only one thing when you consider the points mentioned above. Physical gold maintains its value over the long term and this tangible commodity would, therefore, seem to be a valuable, long-term investment. Especially when it appears demand may outstrip supply in the coming years.

“Buying gold – 5 reasons to invest” a YouTube video from Physical Gold Ltd.

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HSBC: Add $200 to gold price if Trump triumphs

mining-com logo On Wednesday gold made a break for $1,300 an ounce with December futures trading on the Comex market in New York exchanging hands at $1,298.50 an ounce in early morning trade, up nearly 1% from yesterday’s close and the highest since October 4.

The gold price is being boosted by weakness in the US dollar with the currency coming under pressure from the uncertainty surrounding a tightening US presidential contest.

Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential “protection against protectionism”

A Clinton win would be supportive of the gold price, but a Trump triumph could spark as much as a $200 an ounce jump in the price HSBC Chief Precious Metals Analyst James Steel is quoted by Bloomberg as saying adding that the metal could “enjoy at least a 8 percent jump whoever wins the race”:

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Both candidates have espoused trade policies that could stimulate demand, with gold offering a potential “protection against protectionism,” he says. Even the relatively more internationalist Democratic candidate has argued for the renegotiation of longstanding free-trade agreements. That’s positive for gold — even if “not on the scale of Mr Trump’s agenda.

Reuters quotes Craig Erlam, senior market analyst with Oanda in London as saying “the resurgence of Donald Trump in the polls so close to election day has seriously rattled investors”:

“It’s been clear for some time now that markets would much prefer the stability that a Clinton victory would bring for the U.S. economy and the reaction over the last 24 hours or so since the polls started to change so dramatically just confirms this.”

Year to date gold is managing gains of more than 22% or $238 an ounce, one of its best annual performances since 1980.

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How might the US election affect your family’s wealth?

Whilst it may be tempting to amuse ourselves in the UK by watching the heated TV-debates between Hillary Clinton and Donald Trump, should we really be so relaxed? Surely this US election fever over the pond won’t affect our savings and investments. We take a look.

How can the US election impact me and my wealth?

In today’s hugely globalised economy, it’s inevitable that a major event somewhere in the world will impact the rest of the global economy. When that place is the worlds largest economy, the impact can be far more severe than usual. Any volatility in US markets could have both a direct and indirect impact on your investments. Many UK funds, whether equity ISAs, pensions or managed funds, will invest heavily in US stocks. Even more worryingly, the UK companies comprising the FTSE 100, derive almost 70% of their income from overseas. A large proportion of it from the US.


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Volatility and outcome

Its very common for US markets to suffer volatility in the weeks and months leading up to a US election. Markets hate uncertainty, so the closer the race, the less sure the market is of the outcome. The unpredictability of Trump, with no track record in politics and extreme views, means the markets are also unsure and scared of what a Trump victory would bring. It would be a journey into the unknown.
The fact that neither candidate is pulling ahead clearly, suggests that neither is unanimously popular. The outcome may be the best of a bad choice. Certainly, a Clinton win would likely impact markets less, as she would be more predictable. Meanwhile, a Trump victory could initially send markets south very quickly, but would then likely recover to a degree.
It’s also worth considering the individual sectors in which your money invested. For instance, Trump promises to relax legislation on fracking and emissions, likely leading to a boost for the gas and oil industries. In contrast, Clinton is focussed on supporting green energies. Both candidates are focussing on investing in infrastructure, so we may see a short to medium-term rise in building stocks.

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How can you prepare for the result and protect your savings?

Clearly, the key strategy with uncertainty is to spread risk. That way, a fall in one sector, asset or geographic region will be offset by a rise in another. Its also worth keeping a close eye on the election result and the months which follow, to determine if you need to adjust your asset split.
Gold investment plays a key role in providing portfolio balance. Firstly, it tends to perform inversely to the stock markets and the US Dollar. If you purchase physical gold versus electronic gold, you also benefit from owning a tangible asset instead of relying on supposed the value of paper assets.

What are we seeing in the gold market?

After barely pausing for breath after the Brexit decision, the gold market has once again heated up over the past few weeks in preparation for the US election. As the natural safe haven asset, we’ve seen a 42% increase in enquiries in October from the previous month. Just as telling, we’ve observed a theme of investors moving large proportions of their wealth into gold. Their motivation is driven by the worry of a Trump victory and the lack of viable savings account alternatives to beat interest rates.
Trump's effect on gold price
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Conclusion

No doubt, the markets fear a Trump victory more than anything. HSBC said this week that a Trump win would add $200/oz to the gold price. Perhaps many of us have convinced ourselves of a Clinton victory. But we must learn lessons from history. The Brexit result earlier this year demonstrates how the unlikely can happen. Poor preparation for that can lead to big losses. Meanwhile, gold holders benefited to the tune of a 15% rise overnight.
The relationship between the US Dollar, the US election and the gold price is nicely illustrated with this chart by the World Gold Council. With investigations into Clinton’s past, Trump pulled ahead in some polls.
Who knows who will win on 8 November. All I know is that I’ve learnt from Brexit. After the credit crunch and global recession, voters are looking for scapegoats and change. I know that balance is the only preparation and gold is still worth investing in.