The first day of March saw gold prices fall as much as $100 an ounce as markets watched Fed Chairman Ben Bernanke for signs that the US economy would print more Dollars. When his congress speech failed to mention any plans of further stimulus the eager Dollar bulls gleefully took this as a positive sign for the world’s largest economy. With the Dollar rising in value on hopes that no more Quantitative Easing is required, demand for Gold fell. Up until Thursday’s fall, the price of gold had continued to rise handsomely this year so some active market participants also recognised the opportunity to take their profits already accumulated by selling too.

Follow the herd?

It’s human nature to feel comfort in a group and follow the herd. Perhaps seeing what others do first and then follow suit. The sheep mentality. We see this all the time within the investment world, especially with gold. A majority of investors will feel comfort by seeing others buy gold and the gold price rise accordingly and then invest themselves. When the market falls, these very same investors consider selling themselves in a panic, or at the least, wouldn’t dream of bucking the trend and investing more.

However, it is the wise investor who leads the market and breaks free from the flock. It is the more experienced customers we have who have re-invested in  gold at the new lower prices. Quite simply they know that the gold price is volatile, they have assessed the reasons for the price fall, judged that the global economy hasn’t healed overnight, and are very happy to exploit the latest price dip.

Be savvy and break the herd mentality

Many market analysts will agree that the price plunge was larger than warranted, representing a great buying opportunity. Afterall, Bernanke’s speech failed to suggest any change in Fed policy since their last conference. They certainly haven’t ruled out QE3. From a micro perspective we are still seeing good buying of physical gold coins and bars, coupled with relatively tight supply streams. Premiums on coins have held up well but have retreated from the heights of the panic buying periods we’ve intermittently experienced over the past few years.

My advice, is to break from the sheep mentality and take a step back from the day-to-day economic news and data. Medium to long term investment should be taken with that timeframe in mind. If you think the global economy has some way to go before recovering then surely it is better to buy gold in price dips with coin premiums low, rather than follow the  flock and buy when supply is at its tightest and prices and premiums are high.

Growing contagion

Finance ministers are insisting on a 1.5bn firewall around Greece in order to prevent widespread contagion. These austerity measures have been deemed essential for fear that nonconformity will influence the amount of financial support from other EU states. Avoiding the need to speculate, it will be interesting if the same measures and demands are placed on Spain, Italy, Portugal, and Ireland to name a few.

Contagion for the most part is a dreadful prospect and would transmit negativity rippling

through the financial markets. In terms of being able to measure the force of contagion, one would look at depreciating equity indices, the falling value of the Euro and unemployment. Confidence is a major factor that underpins the stability of the market but this can also be measured in the rising price of gold. Since April 2010 gold has risen by almost 62%. Weakened confidence within financial markets and contagion thereof are the single largest contributor to rising gold demand. The fundamentals that support a rising trend for gold are often misconstrued. Its not that Gold has become more expensive; more accurately it takes more (depreciating) currency to buy the same amount of gold. Over the next few weeks, I will be looking at the following issues and how they affect the price of physical gold:

• Inflation
• Unemployment
• Devalued Currency
• Terrorism
• Interest rates

Underlying worry driving gold market

As we start another week, it seems like the Greek debt crisis still shows no signs of reaching a conclusion.  The debt problems suffered by Greece and many other European nations is no doubt one of the biggest drivers of the gold price for 2012.

As a tried and tested safe haven, physical gold provides the natural way to protect savings and investments in times of economic unrest. I think its fair to say that we’re currently experiencing the most unstable economic period in our lifetime – so gold’s stellar performance and expected continuation of its price gains seems obvious.

While the gold price has risen well since the new year, there is definitely the feeling here that it could well explode at any moment – perhaps stimulated by a market event like a UK ratings downgrade, Greek bankruptcy or the Euro dispanding.

However, like the stock markets, the gold market appears to be waiting for some clarity from the Greek bailout plan. It seems the German cabinet is split over whether or not Greece should be helped out as Europe’s governments are due to provide a much larger share of this loan than they did with the Eurozone’s three previous bailouts.

Don’t wait to buy gold

The key from an investment perspective in my opinion is to stick to the age-old adage with gold. Don’t wait to buy gold, instead buy gold then wait. By the time Greece go bust, the IMF are unwilling to provide any more funds or the domino effect in Europe shows its ugly head, gold would already have rallied. If you’re concerned about the effects such economic collapse could bring to your wealth then it makes sense to own some gold now so you’re prepared for any developments in Europe.

Proactive investors who look to spread their risk and assets will be the survivors when the smoke eventually clears.

Gold Investment Market on fire

In the past week we have seen a return to panic buying in the gold investment market.

People from all walks of life and of varying means have moved quickly to secure gold investment. The well publicised problems within Europe have woken investors to the realisation that the single European currency could be about to collapse.

The domino effect of Greece defaulting or withdrawing from the Euro will doubtless lead to the demise of Spain, Portugal, Italy and Ireland. Even the heavyweights such as France will be dragged into the battle for survival due to their huge exposure to the European banking system.

Combined with the growing urgency for the US to increase their overdraft facility or risk defaulting themselves, the general public have realised that everyone will be affected by these events.

They have quickly moved to buy gold coins over the past week to protect against the anticipated impact that a monetary collapse will bring. While equity, bond and property markets would be hit hard by a Euro collapse, gold should go through the roof as it benefits from a flight to safety.

The huge spike in demand over the past week has already brought stories of supply shortages, especially with the most sought after investment coins such as Krugerrands and Sovereigns.

We still have decent supplies of these coins, but we highly recommend buying sooner rather than later, so you don’t miss the boat before the anticipated price spike, or even worse find that you cannot find a supply of gold coins.

Growing US and European Debt crisis

With headlines dominated by economic woes in Greece and US, many investors have been asking if they should buy gold, and what the global debt crisis will mean to the market.

Greek MPs recently voted 155 to 138 to slash public spending as part of a ￡25billion austerity package that will also see taxes soar. With just 2 weeks before Greece’s economy ran out of cash, it will now get a ￡98billion EU lifeline, but even that will only last until September.  However, Bank of England governor Sir Mervyn King claims the money markets felt there was still an 80% chance if Greece defaulting in its debts. The Government and Bank are already drawing up contingency plans to deal with the potential fallout.

The European debt crisis now threatens to enter a devastating new phase amid fears that Portugal – like Greece – will need a second bailout and could spread back to Ireland or even to Spain and Italy.

Anything’s possible

Clearly none of us has a crystal ball, and there remains a multitude of possible

outcomes across Europe. What we do know is that regardless of whether Greece or any other European country defaults on its debts, there is no overnight solution. Any bailed out nation still needs to pay back the funds meaning a prolonged period of high taxes, low spending and low to negative growth.

Importantly, this best-case scenario still provides s solid foundation for gold investment. As the most natural safe haven asset, gold has proved throughout history that it will perform well during these economic downturns.

If however, catastrophe does occur and Greece defaults, Portugal, Italy, Spain and Ireland follow in needing more funds to survive, and these countries start to withdraw from the Euro currency simply to survive; then we may witness the beginning of the end of the single currency.

I’d say the chances of this happening are in the balance, so if you haven’t done so already, it would be wise to buy gold, which undoubtedly would increase in value overnight by 10, 30% or 50% after such an event.  It makes sense, that while we don’t yet know what will happen, we should not bury our heads in the sand. We should prepare for any eventuality and protect our well-earned savings with some gold coins.

US debt growing

In America, Barack Obama has warned that unless his administration allows the US debt ceiling to rise in August from $14trillion, America could default on its existing debts – which would pose a “significant an unpredictable” impact in the world. I never thought I’d hear these words uttered by the ‘world’s safest credit’. This further need for borrowing is already being deemed QE3.

Again, none of us know the outcome of the August meeting. However, it’s fair to say that with the price of gold so closely linked to that of the US Dollar, that gold should benefit whatever the outcome.

If the Republicans decide to support Obama and approve a new ‘overdraft increase’ for the US, the market’s will likely see this as a sign that the Quantitative Easing programs have so far not worked and the US is running out of alternative ideas.

If they don’t approve the extension, the President has already warned of the possible consequences, and a US default would see the price of gold sky rocket overnight and likely replace it as the world’s ‘reserve currency’.

We now live in unprecedentedly unstable times. While we cannot predict the future, the US and European debt crisis means the need for gold in our portfolios is more apparent than ever.

Case for gold

In the past few days economic figures have reminded us of the rocky economic road ahead and the continued need for some wealth insurance. This has strengthened the case for gold as the best way of achieving this portfolio protection.

Firstly UK inflation rose sharply in December to 3.7%, way above expectations. This has mostly come from the huge increases in energy prices. This now puts UK inflation higher than that of hyperinflation prone Zimbabwe’s CPI at 3.2%, thus making a mockery of long standing commentary in the press that it was ridiculous to compare Britain’s inflation problems with that of Zimbabwe.  This month saw the well publicised VAT increase begin which will further fuel UK inflation. Here at Physical Gold, we’ve long been concerned about the possibility of high inflation in the UK due to the dangerous combination of record low interest rates and Quantitative Easing.

 

After these inflation figures were releases the markets reacted by starting to price in interest rate rises as early as the Spring. However, Ernst & Young has warned that any such increase would be premature and put the UK’s economic recovery at risk.

Next up was some unemployment figures. The total has now hit 2.5m after a 49,000 rise. Perhaps most alarmingly for the future is that youth unemployment (16-24 year old’s) increased to the highest levels since records began.

National Debt passes £1 trillion

Finally, somewhat slipping under most people’s radars due to the inflation and unemployment figures, was the news that UK national debt has now surpassed the £1 trillion mark. Just as scary is the pace at which this debt continues to rise – £7,000 every second!

So if you’re honest with yourself and take a hint from the above figures, you’ll come to the conclusion that we’re in this squeeze for a while to come. So with gold providing the balance your portfolio needs in these circumstances there’s no better time to invest in some physical tax free gold coins.

The fact that the gold price has done so well over the past few years means it’s predictable in its nature. With inflation and unemployment struggling, this is the perfect case for gold to continue outperforming every other asset class.

Multi-tasking Tesco

Tesco have recently announced that they are entering the lucrative and sometimes unscrupulous scrap gold market. You will now be able to take your unwanted gold jewellery into selected stores and be able to sell that gold for cash.

Of course the practise of pawn brokers and more recently the multitude of cash for gold companies is nothing new. However, Tesco are the first big name retail brand and certainly supermarket to become involved.

But what can we derive from this unusual foray into the gold market? Well, undoubtedly Tesco are one of the most respected and powerful companies in the UK. They have diversified into clothes, electricals, financial products and many other areas. It’s right to assume that anything Tesco turns its hand to is an area of huge potential profits.

So the very fact that Tesco is very keen to buy your gold should indicate that unless you have to sell, you too should be buying gold. Most market analysts see the price of gold continuing its march upwards over the medium term.

If you have scrap gold to sell then Tesco may be a good option. They’ve promised to beat their main rivals with the price they’ll pay for your old earrings. But that’s not saying much as I’ve heard reports of the ‘Cash for Gold’ type companies offering 10-30% of the true value of your gold.

Your best bet is to shop around and even take your gold into a local jewellers for their price. If its gold coins or bars you’re looking to sell then avoid these companies altogether. You will receive far better value from gold dealers such as ourselves where you’ll achieve nearer the actual gold value for your gold rather than a third or quarter of the value offered by scrap merchants.

Overall though, unless you have to sell, keep hold of that gold as the price is set to soar this year and beyond.

VAT increase

With the UK rate of Value Added Tax (VAT) increased today to 20%, most purchases will instantly become more expensive. In the investment world, the level of VAT charged on an asset can seriously affect returns. For example, the full VAT level applies to the purchase of silver coins and bars meaning the metal has to rise by 20% in value before you make any money (not to mention the huge bid/offer spreads of up to 50% which apply to silver).

Investment gold

However investment gold is still the only precious metal with an official HMRC VAT exemption. The term ‘investment grade’ gold means gold of at least 22 carats in purity in the form of a bar or coin. As long as you stick to these parameters, you’ll pay no VAT whatsoever. Here at Physical Gold Ltd we ONLY deal in investment-grade gold as we always focus on getting our customers the best returns possible. Steer clear of gold nuggets and gold dust as both of these fall outside the HMRC guidelines.

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Generally all the main 1oz bullion coins, Sovereign coins and assayed gold bars will be of investment grade.

The current VAT exemption could be lifted at any time but once you’ve bought the gold tax cannot be applied in a backdated nature.

So while everyone worries how the VAT hike will make life that bit tougher, why not capitalise on the exemption for gold and spread some of your risks. And don’t forget if you buy UK coins such as Britannias or Sovereigns, they are Capital Gains Tax-free too, so you’ll pay no tax when you buy them and no tax on any profits you make!

The key to balance is to diversify

Guest blogger – Richard Broughton

What is QE?

With all the talk of another round of huge stimulus in the US, this latest attempt at kick starting the largest economy in the world is being deemed QE2.

For those in the know, the QE refers to Quantitative Easing – the method of injecting funds into an economy when all else has failed.  The 2 in the title refers to the fact that it will be the second huge cash injection the US have performed in the past couple of years.

In the UK QE2 is best known for our luxurious flagship cruise liner.

But this round of QE would be better compared to another famous historical luxury cruise liner – The Titanic.  Like the Titanic ship, QE2 will be huge. Its not worth the US Government injecting peanuts.

But this time we can all see the iceberg coming. Any QE program is an obvious sign of desperation for a Central Bank.  Indeed figures last week showed the US economy growing at half the pace of the UK’s economy last quarter, which is pedestrian itself.

The fact that the previous stimulus program failed to steady the ship is not a good omen for the latest sticky plaster being placed over the US economy. Simply adding more Dollars poses a huge threat to inflation by its very nature of undermining the value of a currency which has already lost 12% of its value in the past 2 months.

Let’s not fool ourselves, it’s the US tax payer who will have to repay the debts being taken on to provide the stimulus. Just like we are experiencing now in the UK, tax hikes and future spending cuts will have to be implemented to pay back the money.

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The gamble is for the economy to grow quicker than the rate of interest on the QE, otherwise you see a spiralling debt large enough to sink any ship.

So as we set sail on this latest round of stimulus, surely it’s wise to have protection in case we cannot navigate around the iceberg. We all know that holding physical gold acts as a lifejacket when economic and political catastrophe strikes. It can provide the lifeboat- for the average saver and investor to escape going down with the ship.

The saying goes that when the US sneezes, the UK gets a cold. So we’re all on board as the latest QE2 sets sail. Let’s make sure we hold some investment gold in our portfolio, or we risk sinking with the ship’s band and captain!