“This time of year we see more and more people looking to the precious metals market not only as a safe haven investment but also for savvy Christmas gifts.” Daniel Fisher, CEO, Physical Gold.
Buying gold for Christmas
The precious metals market is braced for sales to rise dramatically over the next few weeks, as an increasing number of new investors look to give the gift of gold this Christmas.
Last Christmas, Physical Gold – the UK’s leading provider of gold and silver coins and bars – saw a 53% increase in customers buying Sovereign coins and 5g gold bars, which are designed as gifts to help people save for their future.
In 2020, The Royal Mint saw a 510% surge in gold sales in November and December, compared with the year before. Daniel Fisher, CEO, Physical Gold, said: “This time of year we really do see more people looking at the precious metals market, not only as a safe haven investment but also for savvy Christmas gifts.
Gold preferred to gift cards
“Once a high street gift card might have done the trick, but today there may not be a more savvier Christmas present to buy than physical gold; to invest in your future, a family member’s future or to boost your own investment portfolio.”
Recently there has been a huge uptick in the sale of precious metals, noticeably among young adults, and that has been evident in Physical Gold’s recent sales. According to the Royal Mint, the number of customers purchasing gold aged between 22 and 37 increased by 32% in 2020, as the coronavirus pandemic put precious metals under the spotlight.
Daniel Fisher continued: “At Physical Gold we are hearing from plenty of millennials stuck for Christmas presents, coming to us with a genuine interest in purchasing precious metals; be that for friends, family or partners.
“Lately, too, there has been an increase in older generations purchasing physical gold. A number of our customers have hinted at these investments being put aside for their children’s and grandchildren’s future.”
Gold price spikes with demand
Customers are being warned not to leave their Christmas gold shopping until the last minute as gold prices are expected to rise in December. In 2020, the gold price dropped significantly in November, losing almost 10% of its value. Prices then rose around 3% again leading up to Christmas day and the New Year period. The pattern was similar in 2019, with 3% depreciation in November, followed by 2.5% recovery in December.
Daniel Fisher, says: “Our historic prices would seem to suggest that the best time to buy Christmas gold is around the end of November and early December.
“Whether you are an experienced gold investor, or looking for a unique Christmas gift, Physical Gold offers its customers a simple, transparent and cost-effective route to holding top-grade investment gold in your hand.”
As a present, gold or silver has the advantage of being a tangible gift that someone can open at Christmas. One of the big advantages of precious metals is that there are numerous products you can invest in, depending on what you feel comfortable with. The most obvious is simply to buy physical gold, either in the form of gold bars or coins.
Physical Gold has an extensive portfolio of gold and silver bars and coins in a variety of forms and denominations in the UK. Whatever your reasons for buying precious metals, Physical Gold Limited offers a safe and secure way to buy gold and silver online.
Holding gold in your portfolio might be one way to invest and protect your purchasing power, but there is now an alternative asset that has soared in popularity within recent years: cryptocurrency.
Daniel Fisher, Managing Director, Physical Gold, believes we may now be living in a world where investment in both gold and cryptocurrencies can form a stable and speculative portfolio for investors.
Crypto & Gold’s relationship
Quite often I am asked the question: ‘Should I invest in an emerging asset like Bitcoin or a traditional safe haven like gold?’ As the UK’s leading provider of gold and silver coins and bars, it should be in my best interests to say ‘gold, of course!’ but, driven by changing markets and unsettled Covid-19 economies, I’m becoming increasingly aware of the pull for investors in cryptocurrency – which in turn, is being invested into the precious metal market.
For hundreds of years, gold has dominated the safe-haven asset arena. Some investors like to think of gold as insurance for their money. If there is a concern about a nation’s currency, or if there’s an economic collapse, people usually turn to gold because it benefits in times of crisis. During recessions and times of global turbulence, gold can commonly return more than 30% in a year.
But for those seeking the possibility of mega gains, crypto is tempting many new investors.
While Bitcoin was launched just over a decade ago, cryptocurrencies are beginning to achieve widespread recognition. Historically, those who did not want to ride stock market swings to their full extent invested in gold. However, the exponential growth and increasing popularity of cryptocurrencies over the past year has sparked the interest of many investors.
John Carter, founder of Simpler Trading, says “gold has over 5,000 years of history on its side and isn’t going anywhere, which means it is super safe.” He’s right; gold is valuable as a material for consumer goods and it is scarce. Regardless of demand, gold supply remains low. It cannot be manufactured like a company issues new shares, or a federal bank prints money. Measured against highly volatile cryptocurrencies, gold certainly offers more stability.
Cryptocurrencies fluctuate violently – the rarity and lack of a central authority contribute to this as well as popular culture. Both political and social trends influence cryptocurrency to a higher degree than gold, making precious metals a far safer option. And, while gold prices have experienced volatility similar to stocks in the short term, over time, the precious metal’s value remains stable.
The reports of gold’s demise have been greatly exaggerated. Cryptocurrencies are certainly a legitimate asset and have the potential to be a true “store of value” – joining a select group of assets, commodities and currencies that can be saved, retrieved and exchanged without deteriorating in value. However, gold has at least a 5,000 year head start as a widely-accepted, global medium of exchange and value, and the gold market enjoys great depth and liquidity. The total amount of physical gold held by investors and central banks is an estimated $3.7 trillion.
A match made in heaven
Although some cryptocurrencies have experienced meteoric rises fueled by speculators, having exposure to both gold and cryptos makes sense as our idea of money moves into the 21st century.
Undeniably, there has been clear evidence of a shift in the market. As this new crypto-sector evolves, Physical Gold has seen incredible growth in the “pair trade” between gold and cryptos – investors who swap their digital coins for physical gold and silver, and sometimes back again.
We knowthat diversifying a portfolio can help mitigate risk and potential loss. Today, most investors embed this tactic into their investment strategy, with many arguing that cryptocurrencies and gold are actually the perfect match for your portfolio.
Although Bitcoin doesn’t have age on its side, its soaring popularity reflects genuine investor interest. The crypto revolution has led to an explosion in both the number and value of other digital currencies. Cryptocurrency promises potentially high returns and diversification, but at the cost of security and investors still view precious metals as the stable value store during turbulent times.
If you’re looking for a safe-haven asset that is negatively correlated to other assets, gold has an important role in the stability of your portfolio as a “buy and hold” investment. It also acts as a diversifier, inflation hedge and capital preserver. All of these benefits can result in positive returns over time.
The case for Bitcoin is speculative given that it doesn’t have much utility yet. It is, perhaps, a gambler’s playing field – which for many investors is an intriguing and exciting prospect, but, by also investing in gold they can sleep easy knowing they have their gold in their pockets, while also taking a venture in the cryptocurrencies market. While many crypto projects will fall to zero, physical gold bars and coins will always have an intrinsic value.
The best way to minimise that risk is to use a trusted dealer. Physical Gold offers a convenient and efficient way to buy silver and gold, online with confidence that your purchase is protected by a 3D secure authentication payment system.
In the coming years, we can expect cryptocurrencies to remain subject to more booms and busts, but gold will always be on hand to offer a way of protecting your wealth in a post-Covid-19 world.
Personally, it makes sense to buy both. An investor’s appetite for risk will determine how their money is split between the two asset classes. Diversification is key no matter which route you take. Adding cryptocurrencies to physical bullion can offer security and speculation to your portfolio. So maybe, as we move into our new-normal, now is the time to stock up on both and join the many investors who are privy to this dual investment.
If you’re looking to make the switch from crypto to precious metals, Physical Gold has a variety of gold bullion bars and coins that you can invest in, ensuring your portfolio is safe and stable amidst an ever-changing and volatile market.
The phrase we hear more often than any is; “Is now a good time to buy gold?”. I’ll address that in this update.
One good phrase for timing the gold market is; “Its not the timing of the market, but time in the market”. Trying to buy at the bottom and sell at the top may sound like a wise strategy, but in reality it’s impossible and can lead to reducing your returns and security. The fact is that holding gold over the long term has proven over the years to provide a secure storage of wealth and outperform inflation.
But I don’t want to just beat inflation, I want big returns…..
It’s human nature to want to beat inflation by a large margin and gain more substantial returns. So timing in and out of the market plays a role in achieving this.
While it’s impossible to predict the future, despite many so-called market experts making gold price predictions, timing is about stacking the odds in your favour. This means you look at market fundamentals and choose to invest in assets which look most likely to perform well.
While allocating your money into different asset classes is always recommended, it’s fair to say that now seems like a good time to buy gold.
Because gold has such a long history, we’re able to see how gold has performed before to help predict how it might perform over the next few years.
The gold price has almost always risen in times of severe economic downturns.
Are we heading into an economic downturn?
Even before the pandemic, markets were overheated and global debt at record highs. Since Covid took hold, Governments around the world have opted to print more fiat money to support their suffering communities in the form of furlough support. Now, nearly 2 years on from the start, there seems to be a lethal cocktail mixing which could lead to the mother of all recessions.
The following ingredients are now in play;
Inflation is rising quickly around the world. This is expected when Quantitative Easing programs around the world have been operating at full tilt. Increase the supply of a currency, and it’s value will fall. But we’re also witnessing inflation from broken supply chains. Petrol, building materials, electronic components for cars, food, carbon dioxide, the list goes on. They are all contributing to prices rising at alarming rates. Consequence; Money in the bank is losing value every day. The cost of living is rising. Interest rates will rise soon, increasing mortgage payments for many.
Tax hikes are being put in place to try to reduce (or more realistically stem) the spiralling debt. This can be in the form of increasing National Insurance, reduced tax free thresholds for taxes like Capital Gains, and reduced welfare. Consequence: Less disposable income for the average person means economic growth will be strangled
Continued restrictions are dampening trade. Travel limitations and business restrictions are preventing businesses getting back to anywhere near full capacity. High streets are quiet and shops are closing. Furloughing has ended so the safety net is now gone. Consequences: We’re likely to see a spike in companies going under and individuals losing their jobs
Equity and property markets will likely fall in response to negative growth, poor company performance and less ability to afford to move home.
Continued uncertainty will dampen consumer and corporate confidence. With further spikes in Covid cases, potential further lockdowns and possible ‘long-Covid’ consequences, companies will limit investment and consumers spend less.
How is gold supply and demand at the moment?
During the height of the pandemic, we saw enquiries increase around 700% year on year. That initial rush has calmed, but demand from new investors now seeking the security and protection gold offers as a safe haven, continues to grow. Overall demand remains above pre-pandemic levels and we expect this to rise as recession kicks in.
Institutional money will also increase gold holdings as many competing asset classes suffer. They will look to move allocations out of stocks, bonds and cash, and into gold.
And gold supply….?
Supply of new coins and bars is managing to keep pace with demand. However, due to very few gold holders wishing to sell, we still see huge shortages in the secondary market. It has now been 2 years since we saw decent amounts of sellers in the markets. With the looming economic difficulties ahead, I can’t envisage this changing anytime soon. Premiums on many gold coins are increasing.
Where is the gold price?
As of the time of writing (November 2021), the gold price is moving upwards. It remains more than 10% below it’s all time high in 2020, but has gained around 8% in the past month, as momentum builds.
This was expected as we moved out of the furlough support and inflation began to take hold. While we can’t predict with certainty where the gold price will move in the short term, it seems that now represents good value.
With all these elements working together and interest rates likely to rise for the first time in a decade, it seems like now is a good time to be buying gold.
While some people are seasoned gold investors, gold investment in the UK can be a whole new world for many. In the past decade, gold investment has evolved to become far more mainstream, but most investors remain novices. As such, we regularly help our customers answer questions they have about the market, buying process and how to sell.
One thing’s for sure, you shouldn’t be embarrassed or shy to ask these questions. You need to feel comfortable and understand any asset if you’re considering investing your hard-earned cash. As leading gold investment UK specialists we’ve heard all possible questions many times.
But what are the most common questions we receive?
Type of gold
Clearly, there’s a choice when you come to buy your gold. Questions range from whether you should buy bars or gold coins, 22 or 24-carat gold, or whether various year coins are worth investing in over others. It’s certainly worth doing your research independently as well as seeking advice from experts. Together you should be able to make the right choice. Gold should always be seen as a medium to long-term investment, so there’s no rush to buy. Make sure you’re happy with the type of bar or coin you wish to buy before taking the plunge. While we at Physical Gold focus on selecting the best type of gold for investment purposes, other gold merchants are simply shops and might try to persuade you to buy a type of gold which they have in stock and can’t shift.
The simple answer to these questions is that the best type of gold will vary from individual to individual, which is why our consultation process starts from the beginning and looks at your specific motivations and needs.
Is timing important with gold investment UK?
The golden question (if you’ll pardon the pun!), is what the prospects are for gold in 2022, and whether now is a good time to buy. Be wary of any gold dealer who guarantees returns. No-one has a crystal ball. As mentioned previously, the exact level at which you enter the market isn’t crucial, as gold generally gains in value above the rate of inflation in the long term. However, a good dealer will certainly help you buy in a trough to pick up that extra bit of value and also help you select gold which offers value at that time of purchase. For example, it may be a bad time to buy Maple Leaf coins as there may be a shortage leading to inflated premiums, whereas other coins may provide a buying opportunity as they’re currently trading cheaper.
One shrewd method of eradicating the timing issue is to drip-feed money into gold or split your investment into 2 or 3 tranches. Therefore you iron out some of the volatility and secure various prices, hedging your bets.
Are there tax-efficient ways of buying gold?
If an investment is the main purpose for buying gold, then it’s not only your buy and sell price which contributes to overall returns. Tax plays a crucial role also. Everyone wants to know the best ways to invest in gold. Seeking guidance from a reputable gold dealer will help select tax-efficient gold as gold investment in the UK has several tax advantages. Anyone who’s watched James Bond films may dream of owning huge gold bars. But selling them may incur 28% Capital Gains Tax. Others may not realise that 18-carat gold attracts VAT, whereas 22-carat and 24-carat coins and bars are exempt. UK Tax-free gold coins are usually a safe bet for cash investors, and Pension Gold is a great method of adding bullion to your retirement plan while avoiding VAT, CGT and receiving tax relief on your purchase.
How do I store gold?
Questions range simply from where to store gold, to the exact requirements and costs of each specific option. Certainly, if you’re seeking security and protection from your physical gold, then allocated and segregated storage is the only sure way to be safe. Ensure you receive the correct paperwork to prove your ownership. We’ve heard of horror stories of where gold bought and supposedly stored, wasn’t available when clients wished to taken delivery of that gold. Other rumours suggest that unallocated gold accounts will crumble if too many investors wish to sell at the same time.
How do I buy Gold?
Start off be contemplating what you’re trying to achieve from your investment. Is your primary motivation to maximise returns, or is it to buy small pieces of gold to pass onto grand children one day.
Your investment time-frame and appetite for risk may also help determine whether to go for older numismatic coins or simple bullion coins or bars.
We provide guidance as to which choices will best suit your needs. And for those who feel they want a mixed and balanced tax free portfolio, we offer a service to create a portfolio for you.
During the last decade the Bank of England has increased its Government debt from £200bn to over £800bn as a result of its Quantitive Easing Program . The aim of the program, to stimulate demand for goods and keep inflation low during and post the covid pandemic has been hindered by rising energy prices in addition to supply shortages and bottleneck issues due to Brexit.
With inflation still rising (from 2%-3.1%) and the bank expecting it to reach 5% early next year, this is not good news for the consumer. High inflation erodes purchasing power, so it will cost more to buy the same things. We’re already seeing prices for fuel, building materials and food rising, demonstrating how the scourge of inflation affects everyone, regardless of background or buying habits
Protect your wealth with gold during these uncertain economic times.
More money printing on the cards
There has been much talk recently of the Bank of England printing more money in an attempt to stoke the flames of recovery. The British Chambers of Commerce have put out a plea for the Bank to inject a further £50b into their Quantitative Easing (QE) program.
This program already stands at £200b, and many speculate that this size will grow considerably over the coming year as the Bank seeks ways to fend off a double dip. With the UK debt being the number one priority we will all see our tax bills rise and Government handouts dwindle as George Osborne attempts to rein in spending.
So what does this mean to the average man in the street? Surely any cash injections will be beneficial and help keep the economy bubbling while we tackle the huge debt mountain.
In the short term, the QE program may well be disguising the depth of the problems we face. I see it as a sticky plaster over the gaping wound which our excessive borrowing has inflicted. The main problem in the medium term of simply printing more currency is high inflation.
By injecting more money into the economy, we are helping devalue our own currency. The last country to use QE in a major way was Zimbabwe and they now have inflation well over 1 million percent! This means its people struggle to carry enough currency to even pay for a loaf of bread.
The danger in the UK is the combination of the QE with the record low interest rates and already simmering inflation levels. With inflation already over 3% during the worst economic downturn of our generation, just imagine where it will be once they QE kicks in and we start to emerge from depression. The difficulty is the lack of control we have over cost push inflation. With populations and consumption increasing, natural resources come under further pressure. Commodity prices are helping push up prices of goods and stoke the flames of inflation.
With savings rates at banks usually below 1%, the value of your money is diminishing day by day. If inflation hits double figures, the pace at which your savings depreciate will increase considerably. Many people will see their hard earned money and kid’s inheritance being able to buy less and less.
Protect your wealth with gold
Many of these savers are now moving some of their Sterling based savings sideways into gold. This commodity has always historically been seen as a great hedge against inflation, and unlike Sterling you cannot simply print more of it! As a precious metal it needs to be discovered and mined and World Gold Council stats show that new discoveries and supply are low, helping to push its value higher.
Only time will tell if we see further Quantitative Easing and high inflation in double digits, but it makes sense to prepare for the possibility considering all the factors point in that direction.
More than a decade on from observing a gradual move towards gold as a savings vehicle, we’re seeing the theme become more mainstream.
Interest rates have remained at record lows, meaning bank savings for UK savers yields near to zero.
With supply chains deeply impacted by Covid and Brexit, supply-push inflation is increasing rapidly. Combined with the catalyst of global Quantitative Easing, inflation is mounting a charge upwards.
In reality, this means that leaving money in the bank in 2021 and 2022, returns far less in interest than the current inflation rate.
Add in the very real fear of a global banking crash, and many more people are looking to diversify their savings into precious metals, in order to protect the buying power of their money. We expect to see this theme continue as the world suffers the economic consequences of the pandemic.
Bank savers switching to gold
London, October 14 – Physical Gold Limited, a gold bullion dealer based in the City of London, today reported a massive rise in the number of investors switching out of bank deposits and into solid gold.
With UK interest rates at an all time low, returns on deposit accounts and cash savings are significantly below the rates achieved in the past. In fact many bank savers report interest rates below 1%, even before savings tax is applied.
Traditionally a safe haven to park cash during economic or political turmoil, deposit accounts are now deemed to offer less preservation and protection to savers’ money. The credit crunch has seen banks widening the gap between where they are willing to lend money and pay bank savers. For the latter group, this has meant record low returns.
These poor returns are further threatened by the looming possibility of high inflation. With the framework of record low interest rates, relentless public spending, and the unprecedented move by the Bank of England to print £175bn of new money with Quantitative Easing, the eventual emergence from recession could see the onset of inflation. This would further erode the value of savings, whereby people could see their money able to buy less and less as time goes on.
In an interview today, Dan Fisher, CEO of Physical Gold Limited said:
“There is a growing concern about a currency crash, both in Dollars and Sterling. Gold has protected against the scourge of inflation throughout history and has proved to be the ultimate safe haven asset.”
A new, but very real risk associated with bank savings is that of Counterparty Risk. With many of the High Street banks everyone has grown up with now being bailed out by the UK Government, and examples of overstretching such as Northern Rock, it now means savers have to worry if their money is safe at all. With only £50,000 protected in the UK, any money above this is exposed to the underlying bank’s Counterparty Risk.
Switching money into physical gold coins and bars eradicates any such exposure altogether. The precious metal is independent of any corporate or Government policy, and by its very nature as a physical asset, its value cannot fall to zero. In fact the underlying $ gold price has soared over 200% in the past 5 years alone.
Unlike with bank savings, investment into certain gold coins is totally free from tax, so any gains made on the investment can be kept rather than shared with The Treasury.
Physical Gold Limited has seen many everyday people switching some of their savings into gold and reaping the benefits of the comfort and returns it can provide. Many savers are even contributing regularly as a savings scheme, to gradually build up a golden nest egg.
One of the most common questions I hear is from keen investors wanting to know the best gold coins to buy as an investment.
The most important thing people seem to overlook is the ease in which you’ll be able to sell the coins. It sounds obvious, but so many buyers focus purely on trying to get as much gold for their money when they invest that they forget to consider the liquidity of the gold.
Liquidity makes the best gold coins
Remember that your profit is only realised on physical gold when you actually sell the coins at a profit. So when buying coins your primary focus must be on choosing well-known coins in desirable condition. So please don’t be tempted by an obscure coin just because its £10 cheaper than its globally renowned alternative. With this in mind, any of the well-known bullion coins are a safe bet. These could be Sovereigns, Britannias, Krugerrands, Eagles, etc. You can find a comprehensive list with thorough descriptions at Bullion coins.
A novice should never try to be too smart by delving into the world of numismatic or historical coins. These generally present high potential profit, but also large losses for those without market experience. Proof coins should generally be avoided by the gold investor as you won’t necessarily get the full premium back that they command.
For very modest investors it can be fun to select a variety of bullion coins for your portfolio, perhaps choosing some Sovereign coins with an interesting background or coins with beautiful designs.
This is a series of 11 one ounce 24 carat gold coins (also produced in silver and fractional versions), which are limited in issuance. In contrast to the Britannia or Sovereign bullion coins which are unlimited and mass produced, the Queen’s Beasts coins have been released coin by coin, every 6 months. Once a particular version is all sold, they’re not produced any more.
This relative scarcity, combined with a degree of collectability, has pushed up premiums on these coins far quicker than standard bullion coins.
While the first 8 coins in the series already command high prices, the most recent 2-3 coins are still being produced, albeit not for long. Therefore, premiums on the most recent releases are still only slightly higher than the standard Britannia. While there’s no guarantee that their prices will mirror the earlier coins in the series, there’s a good chance.
However, for those UK investors considering a more sizeable investment you must consider factors such as tax. Capital Gains tax was recently increased for higher rate tax payers in the UK to 28%. That means that if you sell your gold coins at a profit exceeding your annual limit (currently around £12k) then you’ll pay away almost a third of that excess to the taxman. Any other assets you sell in that year will use up that £12k limit too. So if you sell shares or an investment property and make a profit, you’ll no doubt be paying CGT on all your gold profit!
The great news is that with some careful planning and help from a reputable gold dealer, you can source tax free gold coins. Britannia, Sovereign and Queen’s Beasts coins are all free from Capital gains Tax for UK residents due to their status as legal tender. Quite simply the taxman cannot tax the movement of legal currency. For this reason, together with the fact that these two coins are amongst the world’s best known, most UK investors are best off investing into these tax free gold coins.
The most important rule with gold coin investing is that everyone’s situation, needs and motivations for buying differ, and so the best gold coins to buy may also vary. This is where the real value of a knowledgeable gold dealer pays dividends!
Inflation is now rising rapidly as a consequence of;
Massive global Quantitative Easing as a reaction to the Covid pandemic, devaluing fiat currencies around the world
Supply squeeze inflation, caused by a combination of Brexit and Covid-related supply chain issues. With panic buying rearing it’s head, the UK has experienced shortages of petrol, food and toilet rolls.
In 2021 and beyond, gold is becoming a mainstream way of moving money out of the banks to achieve protection from the erosive power of inflation.
With Bank of England policy maker Adam Posen stating the case to print more money, it reinforces the case for owning physical gold.
The Bank of England have already printed £200b of Quantitative Easing (QE) in a desperate attempt to support the UK’s floundering economy. There is now talk within the central bank to extend this by another £50b and potentially open the doors for a further £200b of ‘funny money’.
But what does all this mean to you and me? Well, the last country to use QE in this way was Zimbabwe and they now have over 1million % inflation rates. That means its people literally cannot carry enough money to buy a loaf of bread! Now I’m not suggesting for a moment that we will see similar levels here in the UK. However, this untested act of desperation combined with the record low interest rates can provide the perfect cocktail for an inflationary environment. I can definitely see inflation hitting double digits in the UK in the next few years as the economy eventually heats up.
For the average person that means that their hard earned cash will lose its buying power. If wages don’t increase by 10% or more, then we will all be worse off. Our savings in the bank which receive 1% or less interest now will be losing value day after day.
That’s why I feel it is the proactive and prudent saver who looks to shift a proportion of their savings sideways into physcial gold. Why expose yourself entirely to Sterling, its probable weakness and inflation? Surely its wise to spread your eggs into various baskets and the gold basket is the safe haven asset which protects against both inflation and deflation.
It is policies such as QE which reminds us all that its always worth having a little gold in your portfolio as we never know what the world will look like tomorrow. Certainly we can never safely predict where the central banks will decide to stop.
While ETFs have provided an accessible way for investors to gain exposure to the gold market there are many fears circulating about their security and integrity. For starters, the fact it is a structured paper asset that not everyone fully understands tends to defeat the object of owning a simple tangible asset like gold. So many investors have been stung over the past 5 years investing into asset-backed securities that were rated AAA by the credit rating agencies, only to see them downgraded to junk status overnight when everyone realised that the subprime mortgages they were linked to would not payout. It transpired that many very sophisticated investors never really knew which assets the bond was linked to or understood their lack of protection against such defaults. So are you more comfortable understanding the risks of holding gold coins or gold funds or ETFs?
Press reports are speculating that only 10% of the traded ETF value is backed by actual gold. With a distinct lack of auditing, its difficult to know for sure what the exact figure is.
Jefferey Christian of the CPM Group confirmed that gold is leveraged around 100:1 at a Commodities Futures Trade Commission (CFTC) Hearing on March 26, 2010. This means that there are around 100 claims for each ounce of gold in existence and so not enough gold to be delivered to everyone who has been promised paper gold.
So the question remains would you be able to access the value of your ETF if half or more of the investors decided to withdraw at the same time?
The term counterparty risk has become far more used and relevant over the past few
years. This term didn’t seem relevant to bank deposits a decade ago it went without saying that leaving savings in a high street bank was safe. But things have changed dramatically. Now we’ve seen our major high street banks on the brink of collapse. Who would have believed me 15 years ago if I’d have predicted that RBS, Nat West and Lloyds would be mostly Government owned?
The 2008 credit crunch saw bankruptcies to seriously major corporations from General Motors to Lehman Brothers. I saw many friends who had built up shares in Lehmans over many years of work and anticipated those stocks providing their retirement. No-one could have predicted that they would lose value so quickly and Lehman would go under.
We then saw the next phase of counterparty risk with Sovereign debt. Investors who thought they were taking on very little risk by investing in Government bonds faced the very real prospect of not being paid out in full. Countries such as Ireland, Greece, Portugal and Spain need help from the EU and IMF to repay their debts. There is every chance that bondholders will not receive all the capital back.
And now, in the new Covid world, Government debt is at record highs and corporations are struggling to adapt and survive under the new world parameters.
With physical gold, there is NO counterparty risk. It doesn’t matter if a Government fails to repay bonds, a corporation goes bankrupt or even if the gold dealer you bought the gold from ceases trading. You will always have the physical asset to do with as you like.
By investing in gold mining stock, ETF or Gold funds each poses some sort of counterparty exposure and a threat to the value of your asset. Remember paper gold is a promise to pay, not the real thing!
3. Risk Profile
If you’re considering a choice between mining stocks and physical gold, its crucial to realise that these are different asset classes with entirely different risk profiles. Firstly, investing in mining stocks means your investment is linked to the performance of one company. As a paper asset, if that company underperforms, or even worse goes bankrupt, there is a chance that your investment becomes worthless. The value of gold coins and bars can never fall to zero or anywhere near because of the intrinsic gold content. During times of global economic turmoil mining stocks and bullion perform quite differently. Terror threats, currency depreciations, huge unemployment, record deficits and banking crises don’t provide conducive conditions for equity markets, which is why we’ve seen more and more people fleeing to the safety of gold bars and coins. Generally, while mining stocks have the potential for impressive returns they tend not to outperform physical gold during times of crisis such as the recent credit crunch. During sharp market declines such as the 1987 stock market crash, mining stocks become correlated to the broad equity markets rather than the price of bullion.
4. Comprehensive Insurance
If the reason you want to invest in gold is for portfolio insurance then make sure you have a Comprehensive policy! Everyone knows that gold provides security against economic and political unrest, making it the perfect safe haven asset in the current world in which we live. In that case, you want this wealth protection to be thorough. By investing in paper gold its like buying an insurance policy with get-out clauses. In other words, it doesn’t provide full coverage. There are still risks attached such as counterparty risk. By investing into physical gold, its like having the most comprehensive insurance available, putting your mind at rest that no matter what the next financial headline is, your physical gold holding will provide the necessary balance.
5. Tax Efficiency
In the UK, there is the opportunity to own physical gold coins which are completely tax-free. All investment grade gold is VAT exempt. You pay no income tax while holding the gold and UK coins such as the Britannia and Sovereign are Capital Gains Tax-free due to their status as legal tender. Compare this to paper gold such as a mining stock or gold funds where you’ll have to pay income tax on any dividends and capital gains tax if you sell the shares at a profit. With CGT now up to 28% for higher rate taxpayers, that’s nearly a third of your profits!
Accessibility in times of crisis is crucial. After all, gold should act as your crisis hedge. Over the past month, we’ve read about the attempted ink-cartridge bombers and MI5 revealing renewed threats to the UK, France and Germany. The Eiffel Tower has been evacuated twice in recent months. If one of these attempts gets through and the financial system collapses for a week or so how easy is it to access funds through your gold ETF, mining shares or Gold funds? By holding the physical metal itself, especially in the form of globally recognised coins, you hold the ultimate liquidity.