Why is the smart money investing in gold?

Newspaper showing financial crisis headline

By Joshua Saul – The Pure Gold Company

As political and economic uncertainty increases in the UK and the rest of the world, smart investors are buying gold and gold bullion to protect their assets and save on capital gains tax.

It’s been over a decade since the financial crash of 2008 which shook the global economy but the memory is still fresh. In hindsight, the triggers seem so obvious, but the reality was no-one knew it was coming. Now everyone is on the lookout for signs of volatility, and there are plenty to find. The indicators of a potential crash are growing clearer and the smart money is taking heed, hedging their bets with a gleaming insurance policy by buying physical gold.

Over the hedge

It is the received wisdom that gold rises in value during a recession, and this has borne out through most of the last century. The immutability and rarity of gold gives it an innate value. Owning physical gold is far more tangible than an electronic stock certificate. So, when the value of stocks or bonds or property is falling, gold is usually rising. Which is why it is used as a hedge against stock market volatility and recession by savvy investors around the world. The question is, will there be another recession, and is gold likely to rise this time?

Future indicators

The outlook does look particularly gloomy. In the US, the National Association of Business Economists surveyed 300 economists and found that 77% believe there will be a US recession by 2021. Over half expect it to come either this year or next. While the US is not the world, there is a substantial risk of contagion around the globe if the world’s largest economy starts to slide.

One of the biggest investment banks in the US, Morgan Stanley, believes a global recession could occur within the next three quarters if the US-China trade wars continue to rumble on. The chorus of concerned voices grows ever louder. Nouriel Roubini, an economics professor who predicted the housing market crash of 2007/8 believes the risk of a global recession in 2020 is growing.

Closer to home, Brexit has already caused a massive amount of uncertainty and instability in the markets. It will continue to hang gloomily over the heads of UK politics until a new leader is announced and a deal, or no-deal, is done. Meanwhile, companies are either moving abroad or delaying investments, and some investors are warning against holding UK stocks while the uncertainty of the Brexit outcome remains a risk to the markets.

Crashing out of EU and Gold Price

For the UK, a key concern is whether we crash out of the EU in a no-deal scenario. The outcome of no-deal, according to many economists, would be currency volatility, market volatility and economic contraction as new tariffs come into place. This could lead to product shortages and increased prices. The Conservative Party leadership contest adds another grey cloud to the looming storm of political and economic uncertainty. Frontrunner candidate Boris Johnson has been vocal in his view that no-deal is an important bargaining tool. Meanwhile, the entire process may prompt a vote of no confidence and a new general election, which could turn out a Labour government and further destabilise the markets.

US and China Trading blows

From a global trade perspective, the US-China trade war is the most imminent threat to a potential global recession. The two major economies are lynchpins of trade, and any fallout would be devastating within those countries and would reverberate around the world. The fact that US president Donald Trump is adding fuel to the trade fire with a war of word with Mexico could speed up any downturn.

Going for gold

So, while uncertainty prevails and the indicators turn increasingly negative, smart investors are turning to gold to hedge their bets and protect themselves in the event of a market collapse. Each time Theresa May lost a vote or stepped down, or Donald Trump fired a new salvo in the trade war, physical gold demand spiked.

Demand for physical gold at The Pure Gold Company jumped over 200% in February when Theresa May’s Brexit amendments were rejected. It spiked again by 119% after her Brexit deal was defeated for the second time in March, rose 69% in May when the US-China trade wars escalated and surged 219% after Theresa May announced her resignation.

A lot of this demand is coming from finance professionals who work within the banking or investment industry. They recognise the warning indicators and are looking to protect their own assets from a potential downturn. They are removing exposure to equities and buying physical gold coins and bars as a safe-haven asset that can weather a local or global economic storm. They’ve seen the price of gold rise in response to each political and economic event, and are investing for protection, and to save on their capital gains tax (cgt) bill.

What is the smart money buying?

There are several advantages to owning physical gold rather than paper gold like Exchange Traded Funds or gold mining stocks. One is there is no counter-party risk, of the company or the bank going bust. But another very lucrative reason to invest in certain types of physical gold coins is that for UK residents they are legal tender. This means they don’t attract any cgt when you come to sell them after weathering the economic storm.

Tax Free Gold?

Gold Sovereigns and Gold Britannia coins can be held for any length of time and then sold without incurring any capital gains tax, unlike ETFs or stocks. While spread betting on the gold market also doesn’t incur capital gains tax cgt, as a result of its ctg exemption. Investors in this area should be aware that there is always a risk you could lose more money than you put in, and there is no ownership of the actual metal.

It’s not just retail investors putting their faith in the precious metal. Central banks bought 145.5 tonnes of gold in the first quarter of 2019 according to the World Gold Council, the largest first-quarter increase since 2013. Diversification and the desire for a safe, liquid asset were the main reasons central banks bought gold at such a rate.

The smart money is piling into gold as volatile and uncertain politics and economics indicate difficult market conditions ahead. A savvy investor would be wise to follow suit.

 

Newspaper showing financial crisis headline
< Back to Uncategorised

Related entries

  • Hard Brexit – Can Gold Investment help protect your wealth

    Despite some protestations to the contrary, a hard Brexit will cause substantial turmoil, in society, companies and markets. Investing in gold can help protect your assets form the no-deal fallout. The Brexit vote divided the UK along bitter political lines and the process, from deal to delay to no-deal and back again, has done little...Read more >
  • Donald Trump’s First 100 Days in Office: What will it mean for gold investment?

    The Pure Gold Company 30/01/2017 By Joshua Saul At time of writing, Donald Trump’s presidency is off to a more worrying start than any US president in recent memory. Between rumoured chaos within the government itself, mass protests, ideologically motivated refugee bans, a record low approval rating and mass firings of government employees (as well...Read more >