Gold is one of the world’s oldest asset classes that investors have always depended upon. It is seen as a generally safe asset class that acts as insurance for your investment portfolio. The yellow metal provides safety and security for investors and generates steady returns over the short term. Due to these attributes, investors have repeatedly turned to gold during times of economic uncertainty. Many investors consider gold as removing risk from their lives. The price of gold also beats inflation and protects the value of an investor’s portfolio from depleting. So, we need to understand the risks of gold investment. How do investors perceive these risks and what are they?
The risk of gold investments
While deemed as low risk, gold investment isn’t completely risk-free. The first risk is that the gold price moves lower in the time you hold the gold, known as market risk. This becomes less likely over the medium term, as any market volatility is ironed out. If buying paper gold, there are further risks such as possible leveraging of the asset and counterparty risk.
When you invest in physical gold bars and coins, you are free from counterparty risk. This is a risk generally associated with investments that are dependent on the fulfilment of a transaction by a third party. If there is a crisis in the market or the company that has issued you the paper gold performs poorly, the value of your investments could erode. In such cases, the value may drop to zero, in a worst-case scenario. However, the market price of gold has never fallen drastically over the last 20 years. Gold is an asset class that is free from counterparty risks and holds an intrinsic value.
Market risks of gold
The price of gold can rise or fall due to market demand. Gold is traded in the international markets at a daily price, known as the spot price. The spot price of gold is calculated in US dollars per Troy ounce. There may be price fluctuations over the short term, however, gold has always posted healthy returns over the medium to long term. The price of gold rises in value faster than the inflation rate over the medium to long-term horizon. Therefore, investors view gold as a dependable store of wealth. If we look at price charts of gold over the last 10 years, we can see that the price of gold has never gone below $1,000 per ounce during this time.
Gold price movements
During the mid-1990s, the price of gold was quite different from what it is now. In 1996, the gold price was around $400 per ounce. Then, it rose steadily due to demand from investors. Over the next 20 years, the price of gold escalated by four times its price in the mid-90s. The price of gold started moving up around 2005. It reached the $1,000 mark in 2009. By this time, the world was in the middle of the 2008 financial crisis. Investors were moving their money to gold. In August 2011, it crossed the $1,900 mark. At the time, it was the highest peak. Then, in 2020, gold breached the $2,000 mark and is currently priced at $1,780 per ounce.
Talk to the experts at Physical Gold about gold investments
Physical Gold is one of the nation’s most trusted gold dealers. We are always proud to serve our customers and our advisors would be happy to discuss your investment plans. Call us on (020) 7060 9992 or reach out to us online via our website.
Here we explore an age-old debate of cash versus gold, the benefits/disadvantages of cash and why we conclude that gold is better than cash in the bank!
Note: when we refer to cash, we are meaning cash in both a physical form as well as cash held in a bank account, which can readily be withdrawn.
Benefits of cash
We start our discussions with the benefits of cash, because clearly there are many which we have listed below:
- Familiar – as a type of investment cash is familiar to everybody. Cash can readily be traded for goods and services as required
- Highly liquid – a major benefit of cash is that it is highly liquid. In times of need, the cash owner can use this for whatever purposes they require
- No counterparty risk – holding physical cash has no counterparty risk. Cash in the bank has the risk (albeit small) of the banking collapse and forfeiture/freezing by government authorities
Disadvantages of cash
There are many disadvantages of cash as a form of investment, we go on to discuss just some of these below:
- Destructible – cash in a physical form is destructible, notes will burn for example
- Devaluation – cash could literally become worth a reduced amount through an overnight currency devaluation by the issuing government
- Fraud – cash can be fraudulently copied and may cause the owner to have worthless paper (when stored physically)
- Inflation – as inflation rises the value of cash declines, in times of rampant inflation an investment nest egg can seriously deteriorate
- Local use only – most currencies can only be used locally, for global use they need to be converted, which usually attracts an exchange rate conversion fee
- No capital gains opportunity – there is literally no capital gains to be made from cash (other than perhaps in an economy in deflation, which is rare)
- Theft/loss – physical cash could be stolen or lost. Cash in a bank account could be stolen through fraud and/or bank employee misconduct
Why invest in gold rather than keep the cash?
When looking through the above list of benefits and disadvantages of cash one conclusion can be drawn,
physical gold has all the benefits and most of the disadvantages can be mitigated against. Gold has well and truly stood the test of time and has been used as a method of exchange in trade for 5,000+ years.
Analysing the benefits of cash, we can also say that physical gold is familiar in both coin and bullion formats, is also highly liquid and has no counterparty risk.
Looking at the disadvantages of cash it is clear that physical gold doesn’t have these disadvantages in common. Physical gold is virtually indestructible, and it can’t be devalued by the whim or economic needs of a government. Physical gold stored by the owner isn’t subject to fraud and generally (looking at history) as inflation rises so does the price of gold, which is renowned as an investment product to use to hedge against inflation.
Gold investment as part of a balanced investment portfolio
Gold is the same worldwide, there is no need to convert at a cost into a local currency. Unlike with cash, there is a chance of capital gains with gold, historically gold prices have performed well. Physical gold could be at risk of theft, so the owner does need to make sure that strong security is in place, sometimes this could be through third-party storage, which needs to be investigated carefully to reduce counterparty risk.
Convert cash into gold now
Call 020 7060 9992 and speak to Physical Gold now about your requirements and we can advise on the best approach for you. We can advise on strategies of how to best convert your paper wealth into physical gold and in doing so realise the benefits previously described. If you prefer to, email us now at https://www.physicalgold.com/contact/ for an early reply and to start discussions.
Accessing Gold & Silver
It’s not what you do, it’s the way that you do it! It’s possible to gain exposure to gold and silver in many ways, but the outcome may be completely different from one to another. The most common ways to get involved with gold investment are;
By purchasing physical bullion, buying shares in an exchange traded fund (Gold ETF), a traditional fund or mining company, or riskier option such as spread betting, futures or contracts for difference (CFD).
Gold ETF, fund or Physical Gold. Which option is best for me?
Each option of exposure to precious metals has its merits. The right choice will depend on your individual objectives. For example, if you have a high appetite for risk, then you may fancy your luck investing in a mining company. Alternatively, if you’re looking to actively trade the market, then electronic options such as ETFs will be the most efficient way to achieve the short-term speculation.
However, the most powerful benefit offered by gold and silver, is balance and protection. As well as professional traders, regular, everyday people buy gold and silver to REDUCE their overall risk.
Electronic and paper options provide investors with exposure to the market, but they also present additional risks. This undermines the value of gold & silver as a crisis hedge, or as portfolio insurance in the first place. Investment experience should also play a role in deciding which type of gold investment to opt for. Certainly derivatives should be left well alone by most people as they’re far more suitable for experienced investors. If the market moves against you, the amount you lose isn’t just limited to your original investment due to leverage.
Similarly, if you’re tempted to invest into a gold mining company, far more research is required. Not only do you need to understand the gold market itself, but also you’ll need to examine into the underlying mining company, it’s structure and the ability of its management. Selecting a gold fund reduces the risk of depending on one company’s performance. However, you’re still investing into mining companies rather than gold itself. At the end of the day, you only actually own a piece of paper. Your exposure is not only to the underlying companies within the fund, but also to the manager’s of the fund itself.
A Gold ETF can be a better way of gaining exposure to gold itself, but it too represents certain risks. The fund may be leveraged, so that the amount invested into the ETF isn’t necessarily backed up by the equivalent amount in gold bullion. This means that if sufficient holders of the gold ETF wished to sell their holding simultaneously, there possibly won’t be enough physical gold to satisfy all those sales.
Costs and tax efficiency
Undoubtedly, if your buying cost is your main focus, then ETFs and funds are the cheapest ways to buy gold or gold related companies. The cost of manufacturing gold coins and bars is more expensive than simply buying something electronically. However there are other costs to consider. Funds generally have ongoing management fees to pay. Physical Gold needs to be stored which costs money, although an increasing number of investors are taking personal possession of their coins and bars to storage cheaply at home.
A major factor commonly overlooked is tax efficiency. Investment grade gold is VAT-exempt and certain coins are Capital Gains Tax (CGT) free making ownership fully tax efficient. For the few percent extra you pay when buying, you may well be saving up to 28% later when you sell at a profit.
CGT more important 2022 and beyond
In 2022 and beyond, CGT is a prime target for the UK Government to raise taxes in an attempt to reduce some of their furlough-induced debt. The two areas that have been discussed for amendment are;
- The current CGT tax free allowance of £12,300 could be reduced. Calculations predict that reducing this threshold to £5k, would double the Treasury’s income from CGT. Abolishing the allowance entirely would triple tax receipts
- Increasing the rate that CGT is charged at to match an investors income tax level (up to 40-45% for some!)
Clearly, once you’ve invested in gold, any changes to CGT are out of your control. Therefore, physical gold and silver coins are by far the safest way of providing long-term stability and remain tax efficient.
It’s also the most suitable way of passing wealth down the generations. Trust me, kids prefer to receive something tangible with real value than a piece of paper promising worth. They present the most secure method of protecting your family’s wealth in a tax efficient way.
One of the questions we hear regularly, particularly from investors who are new in the gold business is one touching on the worth of a gold bar. In a bid to answer this question comprehensively, we will explore all the factors that directly affect the value of a gold bar.
Gold bars aren’t all worth the same
Before we begin, it is worth noting that all gold bars cannot cost the same. Even those that have similar weight and size may not necessarily have the same value. Also, worth noting is that the price of gold bars keeps changing each day that markets are open in accordance with the gold spot price.
Factors that determine the value of a gold bar
1) The current spot price of gold
Since the gold bar is just a piece of precious metal, it makes sense for the going price of gold to determine its value. The gold spot price tells buyers about the market’s dollar value of one troy ounce of pure gold. Visitors to our site can always see the latest spot price for gold and silver at the top left-hand side of our web pages.
It is important to keep in mind that the gold spot price varies from minute to minute when the market is open, and also after hours in the Asian markets. After knowing the latest spot price of gold, you should then proceed with the following steps to know the value of a gold bar.
2) Weight and purity
After knowing the current price of gold, you should proceed to know more about the
purity and weight of the gold bar. Typically, manufacturers stamp purity and weight details somewhere on the gold bar – either at the back or on the front.
For the most part, gold bars are either .9999 or .999 pure albeit some brands may be .995 pure. If a buyer comes across a gold bar devoid of this information, it might not be real gold. Copper and bronze are common alloy metals that resemble gold in appearance. On the other hand, gold bar weights vary dramatically from about one gram to 1 kilogram. So, the size may affect the pricing as well.
3) Gold bar melt value
After obtaining the information about the purity and gold spot price, buyers should take gold bar’s weight (in troy ounces) and multiply that by the purity. The result will be the bar’s total pure-gold weight. After that, multiply the result by the gold’s spot price.
For example, if the gold bar weighs 10 grams (or 0.321507 troy ounces), and the gold spot price is $1250 with the purity of .9999, the gold bar value will be:
[0.321507 x .9999] x $1250 = $401.84
Therefore, in this case, the value of pure gold in the 10-gram gold bar is $353.62. This doesn’t include the premium, which is the cost above the melt value that the gold bar might sell for.
A premium refers to the price added to the melt value of the gold bar. Calculation of the premium depends on many factors. Often, the demand and cost of production are the main reasons a gold bar may sell high and above the spot price. Premiums may vary depending on the gold bar’s weight, manufacturer or condition. It is usually indicated as a dollar value or percentage. Typically, as the gold bar’s weight increases, the premium will reduce.
So what’s the best value gold bars when buying?
The price you pay for physical gold will generally reduce as you buy more. In the case of gold bars, if you calculate the price per gram, larger bars are far better value than small gold bars. Infact any gold bars below an ounce in weight are really not of great value due to the high production cost. Most new small bars will be beautifully manufactured to include being encapsulated in a plastic cover, complete with certification. In comparison, similar size gold bullion coins such as Sovereigns (7.32g of pure gold) and Britannias, can be bought at lower premiums as they’re sold loose. 100g gold bars offer decent value, with 250g and 500g slightly better again, and 1kg trading pretty close to the underlying spot price.
Watch our related video – “How much is a gold bar worth?”
So 1kilo bars are the best for worth?
The problems with 1kg gold bars are that many people can’t afford to invest £30k+ into gold at once and secondly, it limits flexibility. After all, if you buy a 1kilo gold bar to reduce the cost as far as possible, then you can’t liquidate £10k worth of gold if you need to. You’re forced to sell the whole bar or nothing at all.
An alternative method to buy gold bullion at the best value is to approach quantity discounts in another way, depending on how much you have to spend. While 1kilo bars undoubtedly offer the best value, discounts are still available for buying a quantity of more modest-sized gold bars (e.g. 1oz).
Instead of buying one 1 kg gold bar, it could provide a good compromise to buy 10 x 100g bars instead. Buying ten 100g gold bars at once will enable you to receive a discount (although not quite as cheap as 1x1kilo bar), but still maintain a degree of divisibility so you can sell some of your holdings if needed.
5) Does brand matter in worth?
When buying gold bars, then the worth absolutely varies according to which brand bars you purchase. Brands such as Umicore tend to be priced slightly lower than Swiss brands such as Pamp, which command a premium. However, the importance of brand diminishes when you look to sell. Certainly, we’d pay the same for a gold bar regardless of its brand. We simply base our price on the gold price, weight and purity. So unless you especially want a Swiss brand for ego, prestige, or as a present, buy the cheapest bar possible. Its value will be the same when it comes to selling. We sell pre-owned gold bars which are amongst our best sellers to savvy investors who realise a brand shouldn’t impact a gold bar’s worth.
6) Value of gold bars versus coins
If you’re interested in gold as an investment, then there are two main types of physical gold to consider. Gold coins and gold bars. As long as these forms of gold are at least 22 carats in purity, then both are exempt from VAT. Other types of gold like jewellery, gold dust, lower purity coins, etc, will attract VAT and so are less attractive as effective investments. Generally speaking, your gold bar will not be worth quite the same as the equivalent weight in gold coins. The value of both tracks the factors already discussed. However, gold dealers will likely pay you very slightly more for desirable bullion coins such as Sovereigns than a gold bar. This reflects that the British coins are Capital Gains tax free and can be sold to a number of potential buyers due to their modest size. Certainly larger gold bars will usually be sold back into wholesale, so premiums are slightly lower to reflect that. We’re not talking a big difference, but perhaps a percent or so, depending on the market.
..and how about the worth of gold bullion versus older coins?
The bigger discrepancy will be when comparing the value of a gold bar with the equivalent weight in a more numismatic coin. If you look at the value of a Victorian gold Sovereign, for example, its worth is not only based on its gold content but also its age, scarcity and desirability. For that reason, the value of a gold bar will always be lower per gram. The value of gold bars will never outpace the general gold price as they don’t contain a historical or collectable value. However, gold bars would have been cheaper to buy in the first place.
Will tax affect my gold bar’s worth?
While UK coins issued with a face value, such as Britannias and Sovereign coins, are Capital Gains tax free, gold bars are not. That means the value of your gold bar could be impacted by the tax. Obviously, if you sell your gold bar below the price you paid for it, then CGT will not have any impact on the gold bar’s worth. Similarly, if you’re gold bar has risen in value, but by not more than the annual CGT threshold (around £12k per annum), then no tax is applicable, and the bullion’s value is straightforward. However, for the larger investor, selling a considerable amount of bars at once, at a profit exceeding your annual £12k allowance, will incur tax, and therefore reduce the overall sale value of your gold bar.
One way around this for sellers of larger quantities of gold bars is to sell some bars before the April 5th tax year and others after the tax year. Spreading profits over two years, ensuring gains are below annual allowances will mean no tax. This strengthens the argument for buying lots of medium-sized bars instead of very large bars which may incur CGT.
Firstly, the general market sentiment and supply/demand dynamic can impact the value of gold bars. That’s because the premium or discount to the spot price can vary according to how busy the market is. When the gold price rises, demand for gold increases and the number of sellers reduces. In this scenario, premiums to buy gold bars can increase to reflect the robust demand and prices paid to buy back gold also increases.
The opposite is true when the gold price is in a period of downside. Fewer buyers mean that gold bars may be snapped up at slightly lower premiums, while dealers may pay a percent less for your gold bar if you’re selling as there are an increased number of sellers.
What can I learn from this?
To maximize your gold bar’s value, buy when the market is quiet (and low) and sell when the market is on fire (even though everyone will think you’re mad!).
Secondly, the value of your gold wafer or bar can be based on either the live gold price or one of the two daily fixings. This may sound like a moot point, but it’s important to understand that on a volatile day, perhaps when important economic figures are released or interest rates increase, the price can vary greatly from morning to afternoon. So if you’re seeking to sell your gold bar, make sure you agree if you’re basing it off the live price, the morning fix (10.30am) or the afternoon fix (3 pm), as this can greatly impact your bar’s worth.
Buy Gold Bars directly from us
Now that you know how to determine the value of a gold bar, why not contact Physical Gold to buy gold bars (or even silver bars) of the weight you want? You can call us on 020 7060 9992 or send us an email through our contact page, and we will be glad to serve you.