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Worth its weight – should I invest in physical gold?

Worth its weight – should I invest in physical gold?

Investors are increasingly turning to physical gold to protect their assets from the volatile and uncertain political and economic climate. The Pure Gold Company is a gold trader with a consultative approach that provides unique insight into the background and motivations of its clients,42% of whom in financial services. Josh Saul, CEO, talks about why gold is in high demand.

Q: Investors have a lot of options available these days, why are they choosing to buy physical gold?

It’s true there is a lot of choice when it comes to investment, from stocks and bonds to property, cars or fine wine, but they all come with risk. The most seismic is the risk of a financial meltdown, which even the former governor of the Bank of England, Mervin King, believes could be on the cards because of the gargantuan size of private and public sector debt across the world.

Even if there isn’t a massive meltdown, a correction in the financial markets can quickly wipe out stock or bond investments. In cases where a person’s primary investment is their home, the possibility of a property market crash is a sobering and credible concern. Because if rates increase to pre-crisis levels, millions of people who have never see a rate rise in their adult life won’t be able to maintain mortgage payments.

Savings accounts are unattractive because interest rates are at a long-term low, and some choose to eschew this option because they question the robustness of the banking system.

Gold tends to go up in value as other investments fall. It’s true it doesn’t pay a dividend, so buyers rely on price rises if they want to earn a return, but most of the time this isn’t the primary motivation for investing in gold. Instead gold is a used as a hedge against a potential correction in the stock market, or a decline in property prices, or an unexpected banking crisis. And depending on the type of gold you hold, it can be a tax-free investment.

The gold price has been performing well in the first few months of 2018, but remains low compared to its peak in 2011. Even central banks around the world are stocking up while the price is down, believing it to be an opportune time for buying gold.

Q: Why gold, and not another type of precious metal or valuable commodity?

Gold has been traded as a form of currency for thousands of years. In fact, it was goldsmiths during the 17th century who created the banking industry as we know it today. Gold’s rarity and adaptability ensure it’s a tradable currency throughout the world, and the ultimate store of wealth. Central banks and countries are duty-bound to hold a certain percentage of their wealth in gold to protect themselves from financial risk.

In the last century, it has fallen in and out of favour, but even accounting for its ups and downs, gold has held its value far more robustly than the paper currency that replaced it. This intrinsic value is what makes it a safe-haven asset, sought after in times of fear and risk, and there’s plenty of that to go around right now.

Q: But there will always be fears and risk, so why buy now? 

The surge in demand for gold is being fuelled by global political and economic concerns. The level of government debt in western economies has never been higher. After borrowing to claw their way out of a recession, the US and European debt mountains will not be easy to shrink. Some influential commentators think that the sheer size of private and public sector debt across the world could trigger another financial meltdown.

Added to the debt pile, Brexit remains a substantial unknown. Despite the exit deadline looming, key economic and trade decisions remain unresolved, so the actual lasting effects of the UK’s exit from the European Union is a significant risk. Meanwhile some researchers believe Germany may be teetering on the brink of a recession, which would be disastrous for the European countries that rely on its financial backbone when crises hit.

And there remains the possibility of an equity correction, with stocks at record highs but volatility levels up as well. Still more worryingly for people whose main investment is their home, a property slump could occur if rates increase to pre-crisis levels. We’ve already seen signs of a slowing retail market, which affects employment figures and retirees with pensions in companies that collapse. These concerns hit close to home for many of The Pure Gold Company’s customers, who would be directly affected by any market or property slump, and have concerns about their pension investments in an uncertain future.

Q: So why buy physical gold rather than invest in a gold linked fund or a mining company?

The alternatives to buying physical gold are to purchase shares in an exchange-traded gold fund (ETF) or a traditional gold fund, invest in a mining company, engage in spread betting or buy gold futures or Contracts for Difference (CFD).

These forms of investment are better suited to short-term speculation, rather than long-term stability and will not protect you from economic crises or insure your portfolio. They all carry additional risk, for example mining company valuations only partially reflect the gold price. A proportion of their value is derived from mining infrastructure, corporate effectiveness and regulatory strictures in their regions of operation, and they mimic the movements of the market far closer than they do the price of gold. Gold ETFs are a financial product and come with the commensurate counterparty risk (and wouldn’t protect against another banking crisis), and spread betting is notoriously high risk, especially for inexperienced traders.

By contrast owning and investing in physical gold bullion is the safest, most manageable and least taxed way to secure your wealth with gold.

Q: What type of gold are people buying?

The most popular form of physical gold to invest in is the gold coin because of the tax implications. UK gold coins such as the gold Britannia and the gold Sovereign are viewed as a currency, or legal tender. This means when you make gains on investing in UK gold coins, you won’t have to pay any tax.

In addition, gold coins are divisible, meaning that they are easier to liquidate to smaller denominations. This fact makes gold coins a more flexible form of investment than, for example, gold bars.With lower costs, demand is also higher for smaller coins, which can often be reflected in buy back prices.

Q: So how do you go about buying physical gold?

Investors can purchase gold from certified dealers in a variety of quantities and grades, typically in bullion or bars. With The Pure Gold Company, buyers are sold gold that is investment grade (22 karats) or higher.

Investors are then provided with a certificate of authenticity, and the option to either store their gold within a secured facility, (usually a London Market Bullion Association vault)which incurs an annual cost that is usually a percentage of the value, or they can have it shipped to their residence for safekeeping. Delivery is fully insured under the Pure Gold Company’s insurance from point of sale until it is delivered. From then on, it’s at the investor’s discretion to sell or distribute their gold as they wish.

Global Banking & Finance Review


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