In the annals of history, 2021 will be viewed as the less brutal of the pandemic years but it has been far from gentle on society and the economy. The vaccine blunted the edge of the COVID-19 sword, but the pandemic is yet to become endemic, and the world is still managing new variants and new waves as the year has turned. Meanwhile, the economic hangover left by government bailouts and global shutdowns will be felt long into 2022 and beyond. Against this backdrop, is it the right time to buy gold in 2022?
Pandemic market hangover
The initial global lockdowns forced governments around the world to pour billions into economic support for people and businesses, raising debt to wartime levels in some cases. The expectation of a steep recovery to counteract this profligacy was short-lived as new lockdowns meant more support was needed and debt ballooned further. The inflation that began to creep up in mid-2021 became a surge and the US ended 2021 with inflation at xx% and UK November CPI was 5.2%.
The inflationary environment has been compounded by product and labour shortages across sectors and geographies, and the squeeze shows little signs of abating. Gold bullion has historically been a reasonable hedge against inflation over the long term, rising as the cost of goods rise and maintaining purchasing power where currency under the mattress has been eroded by the increasing price of goods.
That said, over the shorter term the gold bullion price fluctuates in response to many economic and political stimuli, including inflation, and the correlation is not perfect. Still, maintaining gold in a portfolio of strategic inflation hedges is a prudent move, allowing diversification and safe-haven advantages.
Is buying gold a good idea?
Gold has been a safe-haven asset for hundreds of years. It has held its value and weathered the storms of economic and political unrest through the millennia, and continues to be a sought-after investment. When there is risk and instability in the markets, investors turn to safe-haven gold to retain their wealth, which means the market price often rises.
Securing your investments?
Meanwhile, an inflationary environment brings with it risk and instability for the market. Global governments are trying to moderate economic support measures amidst the Omicron surge while being mindful of inflation and derailing growth with mistimed policy changes. The US Federal Reserve chairman Jerome Powell said in January US interest rates will have to rise if inflation looks to be settling in for the long haul. And higher interest rates, especially if they are unexpected, may put pressure on markets. On the other hand, if interest rate rises are unexpectedly muted, this also creates uncertainty and may influence the dollar, impacting gold as well.
The global economic recovery also relies on supply chain issues and labour shortages being resolved, a faster vaccine rollout in less affluent countries that lag far behind booster-jabbed Europe and the USA, and the avoidance of yet another unexpected shock to the financial system. It is this confluence of uncertainties that makes buying gold a solid investment for a diversified portfolio.
Gold investment shines long-term
Physical gold either as gold coins or gold bullion bars 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 often staved off inflationary pressures and made it a precious metal investment safe-haven. The fluctuations in the gold spot price on a day to day or week to week basis belie a rising trend, and over the last 20 years, the gold spot price has risen by over 530% in sterling terms.
Buying Gold and Tax
We all have to pay income tax, including any gains we make on investments; such as savings, equities, bonds and property, but depending on individual circumstances, physical gold is an exception. Certain forms of the precious metal are capital gains tax-free ( gold coins and Silver coins minted by the Royal Mint) and investment-grade gold bullion in the form of gold bars is also VAT free.
2022 Cost of Living Rise
There is general consensus that household incomes will be squeezed in 2022 because of rising inflation, increased interest rates, a hike in national insurance contributions and a freeze in many tax thresholds which when coupled with wage inflation will push many more households into the next tax bracket. Against this backdrop, investing in tax-efficient physical gold bullion coins, depending on individual circumstances, may offer some respite from the tax burden.
Investment-grade gold bullion 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 bullion for a SIPP it must be in the form of bars and a minimum purity of 995 out of 1000 (99.5% pure).
Investing in physical gold bullion for your SIPP has several benefits, and is becoming more and more popular. Income tax rebates and tax breaks mean that SIPP investment is one of the most tax-efficient forms of investment in an already tax-efficient commodity, depending on individual circumstances. In addition, physical gold’s historic reputation as a long-term safe-haven asset means that it carries less risk than the more restricted investments of more traditional pension funds.
Buy gold bars for your SIPP?
Be aware that when paying into your pension, not all SIPPs are enabled to hold gold bullion 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 we have managed to limp over the 2021 line, 2022 comes with historic economic baggage and its own suitcase of uncertainties. If ever there was a time to protect your assets, it’s now.