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Investing in physical gold: a beginner’s guide

Joanna Faith
Written By:
Joanna Faith

An in-depth look at the benefits and risks of investing in physical gold – the precious metal that divides opinion.

Gold is the oldest currency in the world; a private investment that’s easy to liquidate and in finite supply – but the precious metal still divides opinion.

Some commentators don’t see the value in purchasing gold, as it generates no cash flow but fans regard it as a long-standing ‘safe haven’. It’s also portable, fungible, anonymous and limited in quantity.

Even many of the banks, that were publicly bearish on gold in 2014, are secretly buying the metal. With the gold price currently at a five year low and the stock market hitting record highs, most experts are starting to see the benefit of selling a little of what’s gone up, to buy a little of what’s gone down.

Why buy gold in 2016?

In its latest assessment of the global economy, the International Monetary Fund (IMF) warned “the world is on the brink of recession” due to weaknesses in emerging markets.  Investing in gold is a good way to protect your wealth against market risks and to diversify your portfolio.

What’s more, gold tends to increase in value in times of uncertainty (political, economic, monetary) while other commonly held assets, such as shares, tend to fall in value. But it’s not all about income and growth. Gold is a safe-haven asset that provides an insurance policy against the risks outlined by the IMF.

Why protect your wealth? The risk factors …

War & Terror: the ongoing threat from ISIS as well as uncertainty in various parts of the world including Israel & Middle East, Russia & Ukraine and North Korea.

UK national debt is 300% higher than in 2008.

EU uncertainty: the fragile economies of peripheral countries Greece, Ireland, Portugal, Spain as well as the possibility of Britain’s exit.

Slowdown in China and decline in world trade, undermines the stability of emerging economies.

Savings accountsrestrictions on access to savings accounts (Greece, Cyprus). HMRC are now permitted to help them self to any tax they think you owe.

Quantitative easing in Japan, China, EU means a reduction in value of currency, so it takes more currency to buy the same amount of gold.

Counterparty risk of various banks and institutions, due to the factors above.

The benefits of investing in physical gold

To protect your wealth from the risks listed above.

Gold is at its lowest price in six years.

Private investment: there is no requirement to register ownership of physical gold.

Hedge against inflation/deflation.

Diversification: gold has an inverse relationship to other commonly held assets.

Capital growth & returns: gold has risen 330% since 1999, against the FTSE of 173% and housing market rise of 231%.

It sits outside the banking system and associated counterparty risk.

It’s a universal currency that’s easy to liquidate.

Tax advantages: certain types of physical gold coins are exempt from taxes, similar to an ISA but with none of the restrictions.

Finite supply: unlike cash or equities gold cannot be simply created.

The risks and downsides of investing in physical gold

Cost: physical gold can me more expensive than gold-based equities or funds. The tax advantages help balance out these costs.

Income: physical gold doesn’t pay you a dividend like other asset classes.

Volatility: like any asset class the value of your investment can fluctuate.

Liquidity: certain types of gold are more liquid than others so it’s important that you’ve had the correct guidance. Buy from a UK gold dealer that can offer a Buy Back Guarantee as this will create instant liquidity when you need it.

Storage costs: some buyers are reluctant to keep their gold at home. If you do keep your gold at home make sure it’s kept in a safe place. Alternatively you can opt to have your gold stored – for a fee. Make sure your gold is stored within a London Bullion Market Vault (LBMA) and is segregated, allocated and fully insured (which essentially means your gold is kept within its own mini vault).

Delivery: some providers will charge you for delivery while others won’t. Make sure it is fully insured while in transit.

Authenticity: make sure that what you’ve bought is authentic. Some providers will supply a Certificate of Authenticity.

Unregulated: physical gold is not regulated by The Financial Conduct Authority (FCA). So make sure you understand what you’re doing before you make a purchase. Some providers offer a consultative approach to purchasing physical gold.

Joshua Saul is director of The Pure Gold Company