“When to invest in gold?” is a question we often hear from potential investors. In this guide we explore when to invest in relation to financial and political events, as well in relation to personal circumstance.
Physical gold investment is primarily used as a means of storing wealth in a stable medium, preserving the value of your money against uncertainty in other areas.
In today’s financial climate, with global tensions high, political turmoil in the West, rumblings of war in Korea and Syria, relentless cyber attacks, low interest rates and high inflation, the stability and security of gold investments is attractive to investors.
So when should you invest in gold?
Gold investment is a good idea:
It’s also a good idea after certain personal circumstances such as a windfall, or as a hedge in a private investment portfolio.
If perfect foresight were available, investors would choose gold in advance of investor-confidence reducing events, like political turmoil or financial crises. However, even without perfect foresight, a keen eye on current events and economic trends and a strong understanding of the market can lead you to the right conclusion.
The promise of fiscal stimulus from Trump means inflation could rise. What this means for gold price is a complex question, which some conflicting schools of thought.
Some analysts have predicted a drop in gold price – higher inflation means the Federal Reserve are more likely to raise interest rates, leading to investors selling gold in order to benefit from yield-bearing assets.
However, historically gold has prospered after inflation goes up. Gold is in fact traditionally used as a hedge against inflation, so according to most analysts Trump’s actions are a good sign for those thinking about investing in gold.
The purchasing power of cash compared to gold gives some indication of how well gold has performed in recent decades compared to currency, and how it acts as a protector of wealth against inflation. In 1920 an ounce of gold used to buy the same as $20 – a quality tailored suit. Now an ounce of gold is worth upwards of $1000, and $20 wouldn’t even be enough for a necktie.
When is a good time (economically speaking) to invest in gold? The answers to this can be tricky, and in fact the relationship between gold price and other key economic metrics is often represented inaccurately.
In simple terms, the price of gold does tend to go up when investor confidence in economic markets is low. It is for this reason that gold is seen as a protector of wealth and a valuable hedge against other forms of investment, which are usually subject to counterparty risk.
Currently we are facing years of reduced interest rates, meaning borrowing has been cheap. However, there is a lot of talk about whether the USA’s Federal Reserve will perform a rate hike, which is likely to have a significant effect on the world’s markets, and affect gold prices.
Interest rates and gold are intertwined in a way that’s more complex than the commonly held “interest rates go up, gold goes down” idea. Interest rates were increased by the federal reserve by five percent between 2003 and 2008 – gold also climbed. The correlation between gold and interest rates between 1970 and 2015 has been shown to be at 28% – not historically considered a strong enough correlation on which to base secure financial decisions. On the other hand, so far since 2015 every time US interest rates have risen, gold has also risen within 3 or 4 weeks.
That said, double digit increases in gold price have in fact been seen consistently after rate hikes, despite assumptions about gold’s relationship to interest rates. The relationship is tricky, but even if interest is set to rise, the current situation is still a positive one for gold investment.
The price of gold is influenced by a variety of political and social factors, and knowing what world events are likely to affect major players in the investment market will provide a good understanding of when to invest.
The massive rise in the gold price following the Nixon Shock is a good example of this, as is the consistently high UK gold prices following the political turmoil of Brexit and the upcoming general election.
Answering the question “when to invest in gold” politically is easier than economically, as the trends are clear: political uncertainty favours gold. And with Donald Trump, Brexit, the Eurozone in crisis, trouble in the Middle East and widespread disaffection, it’s clear that the current climate favours gold as a means toward protecting wealth.
Investing in gold is an excellent way to protect and consolidate acquisitions of wealth, be they recent windfalls such as an inheritance, or long-term accumulation.
After a large, sudden and perhaps unexpected gain in capital an understandable and sensible desire is to protect it as much as possible. It is for this reason investing in gold after an inheritance is popular and a good answer to the question “when to invest in gold”.
Many investors also choose to invest in gold as a result of investigation into other forms of investment, as a hedge against assets tied to financial markets. This is something we see often with clients of The Pure Gold Company – diversification of your newly acquired wealth, spreading your investments across multiple fields and forms of investment, will insulate it from the risk that one market will crash, or one bad decision will drag the rest down.
In fact, using gold’s steady value as part of a diverse investment portfolio is a tactic used by the world’s greatest investors and hedge fund managers, so even if you’ve already invested in other areas, it’s still a good time to invest in gold.
There are other investment assets and classes that might present an alternative to physical gold while retaining the same benefits and protections, of course. Property and 10/20 year bonds are both long-term investments with a high degree of security, while shares in FTSE 100 companies are relatively reliably profitable. However, these forms of investment may not be as stable as they currently appear
Property, for example, looks set to see an oversupply situation that bursts the current market bubble, especially as the costs of borrowing inflate. This oversupply could result in even the most stable property investment collapsing in value.
Banks, where most of us leave our wealth in order to “protect” it, present a high level of counter-party risk. Deutsche Bank have recently been downgraded, and many other European banks are linked to unsteady Spanish and Italian banks (and UK banks like Northern Rock).
However, over the past 10 years gold has demonstrated higher average returns on investment than any of these investment mediums, with a whopping 131.11% total increase in ROI compared to just 18.80% for property and 30.07% on bonds (compared to 29% total on inflation). Cash savings, by contrast, would have generated less than 10% return on investment through interest.
The most common time to invest in gold is after years working hard and accumulating capital, that you wish to preserve either for retirement or to pass on to your love ones.
Using a physical asset, which you own and is stored in a safe place, as a way to preserve wealth earned over the course of a career offers a uniquely comfortable way of safeguarding your assets for the future.
When it comes to preserving wealth, gold also offers a tax efficient way of growing your capital. Gains made with other forms of investment are subject to Capital Gains Tax. UK legal tender gold coins, such as gold sovereigns and gold Britannias, are exempt from the Capital Gains Tax, while many other forms of gold investment are exempt from VAT. By shifting your gains into tax free gold before self assessment tax returns are due, you may be able to avoid unnecessary taxation.
When doing the financial planning behind a pension more and more people are looking to gold as a way to protect their wealth. After the banking crash in 2008 many people lost large amounts when banks failed or shares collapsed, leaving them in a difficult situation at a vulnerable time in their lives.
Investing in gold through an SIPP is a tax-efficient and reliable way of managing a retirement fund. Through something like The Pure Gold Company’s Pension Gold scheme you can feel safe about your pension and indeed watch it grow, making “when arranging a SIPP” another excellent answer to the question “when to invest in gold”.