Building a robust portfolio involves spreading your risk over different asset classes. However, as an investor, you need to consider the dynamics of each asset class that you invest in. Diversification can be an excellent initiative for shaping your portfolio, which will likely continue to evolve. This reorganisation is often due to prevailing market conditions at different points in time and the risks faced by equity and debt markets around the world. Many investors believe that gold should be an integral part of their portfolio, as it provides insurance against market risks. But how can we compare gold investments against equities?
The uncertainty faced by the global capital markets
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Over the last two decades, the global capital markets have witnessed large degrees of turmoil. The fall of Lehman Bros kicked off the recession in 2008, which resulted in a debt crisis that affected financial institutions and countries all over the world. In 2019, debt levels in China were 300% of the country’s GDP. Australia was also mired in a debt crisis that saw individuals raking up debts up to 200% of their income levels.
Uncertainty was looming over the US and European capital markets. Then, in 2020, the global pandemic hit the world. As global economies were affected by the impact of the crisis, companies started shutting down due to lockdown measures implemented in several countries across the world. By December 2020, government debt in Australia had almost doubled over four years. COVID-19 pushed the U.K.’s debt levels to £1.125 trillion with a debt to GDP ratio of 97.5%. Naturally, these are legitimate causes for concern when investing in stock markets, particularly at this point. Oh, and we haven’t even mentioned “Brexit” and the long-term effects this is having on the EU, UK, and world economy!
Gold and the equity markets have an inverse relationship
A mixture of gold and stocks is ideal. Both investments can rise or fall in value. However, while stocks can fall to zero (if a company goes bankrupt), physical gold will always have its intrinsic value. The equity and gold market have track records for recording great returns over the medium and long term. While stocks can pay a dividend as well as an increase in value, those partaking in gold investing are looking purely for capital gain. Gold tends to rise when stocks fall, so the two have an inverse relationship.
Gold provides insurance for your portfolio
Therefore, it was no surprise that gold touched its highest ever level in August 2020. Over the last eight months, gold has climbed down from its $2,000 peak and is currently hovering around $1,745 per ounce. It is important to note that the price of gold has never fallen below the $1,000 mark in the last 10 years.
Gold investors always study historical price charts to understand the price movements of gold. Of course, the price of gold has never fallen to $0.00 and never will.
It has continued to rise steadily and created value for investors over a 5 to 6 year period. Gold can also offset market forces like inflation and currency devaluation. In a debt crisis, investors often lose their confidence in hard currency is like the US dollar or GBP and move to gold. Since they are confident that gold will not devalue suddenly, it is a choice worth making.
Indeed, gold is considered to be a safe haven by most investors who want to hedge their risks during a time of market turmoil. As the world hurtles forward towards another economic recession, we are witnessing similar trends in the price of gold. Not only does the yellow metal provide stability to your portfolio, but it also acts as insurance against rough times. Moreover, the price of gold also beats inflation, which makes it an attractive asset class to invest in.
Tax benefits of gold
Gold investors in the UK have certain advantages when investing in gold. Firstly, all investment-grade gold is exempt from VAT in the UK. Therefore, this knocks off 20% of your purchasing price. This is one of the reasons why gold is extremely attractive to investors. Secondly, investing in gold coins that are considered to be legal tender and have a face value can have even greater advantages. Gold coins that are legal tender are exempt from Capital Gains Tax (CGT). This means that you do not have to pay taxes on the profits you make from selling your gold up to a threshold of £12,000 in a single tax year.
Discuss your gold investments with Physical Gold
Physical Gold has an investment team that can help you compare the advantages and disadvantages of investing in global stock markets or gold. Please call us on (020) 7060 9992 and speak to a member of our team. You can also reach out to us online via our website and we will be happy to help you make the right investments to build a strong portfolio.