The many benefits of gold begin with its simplicity. Gold has endured centuries as a mark of wealth, it is indestructible, relatively scarce and cannot be manufactured. It provides a refreshing departure from the complex investment products in the headlines today.
There is a finite supply of gold in the market, which creates exponential price rises when demand increases. When demand increases, production cannot simply rise to match demand, so the supply/demand dynamic naturally pushes prices higher. This also reduces the risk of devaluation as lower prices quickly attract new demand, which will once again fuel price increases.
Gold is deemed to be a safe product that investors have always turned to in economic downturns. Its performance is apolitical and therefore independent of any one country’s policy agenda. It is therefore perceived to provide a hedge to anyone suffering value losses to their property, ISA, stock portfolio, bonds and pension.
History has shown that the financial world moves in cycles. In a period when one asset class performs well, another may produce losses. It is impossible, and far too risky, to try to call these exact cycles by placing all your hard earned money into one investment area. Instead, any Independent Financial Advisor (IFA) will recommend spreading the risk between the various asset classes, shifting the percentage of each holding according to the economic conditions.
This way, an investor always owns a variety of assets, so any falls in one area will hopefully be offset with another, producing good returns over the mid-term, and no nasty shocks. In this way, owning physical gold actually reduces the overall volatility of a portfolio. In the current uncertain times, experts believe up to 20% of holdings should be in gold, with perhaps 5-15% in better times.
No Counterparty Risk
In its physical form, the holder has no risk to any counterparty. This is particularly relevant in today’s new financial world, where money is no longer even safe simply in a bank account. It also avoids the counterparty exposure that investors in gold stocks, futures and options have.
There is no VAT to be paid on investment gold. Unlike many other investments, there is no Capital Gains Tax to pay on profits of UK Sovereign and Britannia coins, as they are deemed to be legal tender. Tax relief of up to 40% is available on qualifying gold bars as part of a pension.
Gold is an internationally recognised and trusted form of exchange and has been since ancient times. Therefore, the worldwide network of dealers can provide prices 24 hours a day for both coins and bars.
More than just a valuable investment, gold coins are part of the nation’s historical heritage, and can be both beautiful and collectible. In fact, many gold investors and collectors take great pride in their coin portfolios, often preserving them within their families for several generations. Note, this also contributes to a decline in the market supply of gold, once again increasing gold’s value!
Cash is not King
Investors worldwide are nervous about the global financial crisis, with Governments committing to huge bank bailout packages, which will inevitably have to be funded by the tax payer.
The very fundamentals of banking have changed forever, with the perception of strength and safety now a thing of the past.
In Europe we’ve witnessed countries such as Portugal, Greece and Spain struggling to repay debts within the constraints of the single currency. In the US, we’ve seen the Dollar continue to depreciate, and many no longer regard it as the world’s reserve currency.
We have not escaped this in the UK, and a majority of our large high street banks are now partially nationalised. We have the first coalition Government since 1945 – inevitably meaning indecision on major policies. With interest rates, and therefore savings rates, at all time lows, returns on bank deposits are negligible. In fact, with the pound depreciating, and the threat of hyper-inflation as the central bank considers printing more money supply, returns can actually be negative. Simply parking money in deposits is no longer the safe haven it once was.
The fact is that faith in numerous major world currencies is at an all time low. Concerned savers and investors are seeking a new, more reliable store of wealth, and many have turned to gold. Simply leaving your savings in the bank and burying your head in the sand will not safeguard the value of your money. It is the proactive saver who is now moving some of that money sideways into gold to reduce their exposure to traditional currencies.