Should I Invest in Gold in 2021?

As we move into 2021, we explore what the year ahead may hold in store for investors. Can precious metals help protect your wealth in such uncertain times?

The events of 2020 have been so unexpected and so far-reaching we can only hope that 2021 proceeds with fewer surprises. It’s almost unthinkable to expect a similar level of disruption and volatility this year, but the lingering effects of the pandemic, third lockdown, job losses, corporate and government debt and a slurry of bad news days is evaporating hopes for a miracle recovery.

Instead, 2021 will involve a long and painful period of readjustment as the economy is finally reawakened while trying to adapt to new Brexit requirements. In perpetually turbulent times, safe-haven gold has a long history of asset protection, and this year is a good time to invest for the first time or add to your portfolio of the precious metal.

National lockdowns and recession

At the height of the summer last year, with lockdown easing and infection rates down to manageable levels, there was broad hope the worst was over. But with the new virulent COVID-19 strain and surging patient numbers, January has found the UK back in national lockdown, squeezing already pressured businesses, adding to social and financial pressure and increasing government debt even further.

Expectations for a double-dip recession are rising. At the moment, the country is pinning its hopes on the COVID-19 vaccine as a route out of repeated lockdowns but the most optimistic estimates are not guaranteed, and millions will still be unvaccinated by the spring. Suren Thiru, Head of Economics at the British Chambers of Commerce said: “Though the vaccine rollout provides real optimism, a new national lockdown means that a significant double-dip recession in the first quarter of this year is looking increasingly likely.”

The long-term consequences of the economic and social shocks the world has been through in the last year are very significant. The Centre for Retail Research estimates that almost 180,000 jobs have been lost in the retail sector in 2020, and predicts a further 200,000 job losses this year as shops on the brink lose the government grants and furlough that are keeping them afloat. And that’s only retail. Hospitality and leisure have been decimated, and many other companies will flounder when the support packages are concluded.

This means more people with less money to spend, more government support required, even greater levels of debt than the country is already in and a much longer recovery time. The performance of the global markets in the midst of this stalled recovery is uncertain.

Global gold price stimulus

The global stimulus packages governments have been forced to dish out are a key reason many gold investors are bullish about the metal. US stimulus measures depress the dollar and impel investors into assets like gold. With the economy in such a difficult state, interest rates are unlikely to rise anytime soon.

In the UK, the Bank of England ( BoE) may decide to move to negative interest rates as a double-dip drags the country down further. The BoE recently questioned banks over their readiness or ability to process negative interest rates. This implies that the BoE may consider negative interest rates as an arrow in their arsenal as the economy struggles to recover from the COVID pandemic.

When interest rates are low or negative, gold’s lack of yield becomes less of a deterrent and demand may increase. Coupled with a very subdued economic outlook, investment in the yellow metal looks increasingly attractive.

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Gold shines as a long term investment

Gold is best invested for the long term. The spread between the buying and selling price makes turning a quick profit difficult, and its value lies in the centuries-long rise in price that has staved off inflationary pressures and made it a precious metal safe-haven. Over the last 20 years, the gold price has risen by almost 700% in sterling terms, whereas the FTSE 100 has in that time fluctuated widely and is now around 10% above the same time 20 years ago.

Last year was a particularly strong year for gold, with the precious metal reaching all-time highs mid-year, and ending the year up 20%. The strength of the gold price shouldn’t be a deterrent for new investors who think they may have missed the boat. Goldman Sachs in November forecast dollar-denominated gold to rise to $2,300 in 2021, a 20% rise from current levels, fuelled by inflation fears. Meanwhile a few months ago Citibank had a 6-12 month, $2,400 gold price forecast.

Tax and gold investment

We all have to pay income tax, including any gains we make on investments; such as savings, equities, bonds and property, but physical gold is an exception. Certain forms of the precious metal are capital gains tax-free (Gold Sovereigns and Britannias) and investment-grade gold is also VAT free.

Considering the exorbitant level of debt the government has had to rack up to bail out the UK economy, the possibility of tax rises are a reasonable assumption in order for the debt to be paid down. In December Chancellor Rishi Sunak announced a consultation on a shake-up of the capital gains tax laws. The report, prepared by the Office of Tax Simplification, suggests that capital gains tax is aligned more closely with income tax.

UK income tax is paid at 20% for basic rate taxpayers, 40% for higher rate payers and 45% for additional ratepayers. This would double the tax burden on share and asset sales. Physical gold coins, as legal tender, would remain capital gains tax-free.

Gold as a pension investment

In 2006 the UK government allowed physical gold to be held in Self Invested Personal Pensions.( SIPP) When you buy gold for a SIPP it must be in the form of bars and a minimum purity of 995 out of 1000 (99.5% pure).

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The tax advantage of holding gold in your SIPP is that the government will provide tax relief between 20% and 45% depending on your tax rate. This might significantly boost your available pension pot at retirement. The increase in the value of your gold over time is also free of capital gains tax, which is normally paid at 28%. Be aware that when paying into your pension, not all SIPPs are enabled to hold gold so it’s worth checking which SIPP pension schemes allows this type of pension contribution.

Investing in physical gold has been a safe-haven choice for hundreds of years, and it has proven itself through many of the slumps and recessions over the last century. While no one could have foreseen the events of 2020. It’s clear that 2021 will continue to be hindered by the longer-term effects of the ongoing pandemic. If ever there was a time to protect your assets, it’s now.