Written by Joshua Saul – The Pure Gold Company
An in-depth look at the benefits and risks of investing in physical gold – the precious metal that divides opinion.
Gold is the oldest currency in the world; a private investment that’s easy to liquidate and in finite supply – but the precious metal still divides opinion. Some commentators argue that investing in gold doesn’t generate cash flow or a dividend, but it is widely lauded as a safe-haven asset because the price of Gold has held its value for centuries. The immutability and rarity of the precious metal gives it an innate value, and it has a venerable history of increasing in value during times of crisis, which makes it an ideal hedge when other assets are declining.
Many investment firms are predicting a rise in gold prices in the next twelve to 24 months, which will come on the back of an already substantial increase in the first half of 2019. The price of gold is up over 20% since the start of the year (in dollar terms) at around $1,500, but Goldman Sachs, Merrill Lynch and other commodities analysts think this could touch $2,000 in the near future.
This gold investor guide will help you make the most of a potential gold investment.
In its latest assessment of the global economy, the International Monetary Fund (IMF) reported that global growth remains sluggish and the risks to their forecasts are mainly to the downside. Investing in gold is a good way to protect your wealth against market risks and to diversify your portfolio.
As many commentators are predicting, gold tends to increase in value in times of uncertainty (political, economic, monetary) while other commonly held assets, such as shares, tend to fall in value. It’s not all about income and growth. Gold is a safe-haven asset that provides an insurance policy against the risks outlined by the IMF.
Why protect your wealth? The risk factors …
War & Terror: Geopolitics is fraught with diplomatic impasses and potential threats. North Korea and the Middle East remain precariously in the spotlight.
Brexit: the interminable process of leaving the EU is creating political, social and economic uncertainty and market turmoil.
EU economics: the fragile economies of peripheral countries, especially Greece, remain an issue, but more worryingly the large stable economies including Germany may be heading for a recession.
US China trade war: Tit for tat tariffs are already damaging some corners of international trade, and the repercussions of US economic policy could contribute to a global downturn.
Recession risk: the risk of a UK or global recession remains a distinct possibility owing to all the factors mentioned above.
Savings accounts: With interest rates still so low and the potential for more cuts if Brexit tips the UK into a recession, there is hardly any reason to save in a bank account.
Sterling: The pound has been in decline since 2018 and will likely weaken further if the UK leaves the EU without a deal. This diminishes the purchasing power of UK citizens overseas, increases the cost of imports and lowers the value of sterling-held assets.
Counterparty risk of various banks and institutions.
To protect your wealth from the risks listed above.
Gold is expected to continue to rise in value.
Private investment: there is no requirement to register ownership of physical gold.
Hedge against inflation/deflation.
Diversification: gold has an inverse relationship to other commonly held assets.
Capital growth & returns: gold has risen over 450% since 2000, compared with the FTSE 100 which has gained just 20% since to 2000 and house prices which are up almost 200% since the turn of the century.
It sits outside the banking system and associated counterparty risk.
Gold is a universal currency that’s easy to liquidate.
Tax advantages: certain types of physical gold coins are exempt from taxes, similar to an ISA but with none of the restrictions.
Finite supply: unlike cash or equities gold cannot be simply created.
The risks and downsides of investing in physical gold
Cost: physical gold can be more expensive than gold-based equities or gold exchange traded funds. The tax advantages help balance out these costs.
Income: physical gold doesn’t pay you a dividend like other asset classes.
Volatility: like any asset class the value of your investment can fluctuate.
Liquidity: certain types of gold are more liquid than others so it’s important that you’ve had the correct guidance. Buy from a reputable UK gold dealer that can offer a Buy Back Guarantee as this will create instant liquidity when you need it.
Storage costs: some buyers are reluctant to keep their gold at home. If you do keep your gold at home make sure it’s kept in a safe place. Alternatively you can opt to have your gold stored – for a fee. Make sure your gold is stored within a London Bullion Market Vault (LBMA) and is segregated, allocated and fully insured (which essentially means your gold is kept within its own mini vault).
Delivery: some providers will charge you for delivery while others won’t. Make sure it is fully insured while in transit.
Authenticity: make sure that what you’ve bought is authentic. Some providers will supply a Certificate of Authenticity.
Unregulated: physical gold is not regulated by The Financial Conduct Authority (FCA). So make sure you understand what you’re doing before you make a purchase. Some providers offer a consultative approach to purchasing physical gold or a gold investor guide, and you should check these before you buy.