Need to diversify

With the traditional asset classes falling in value over the past couple of years, conversations about alternative assets have come more into focus.  With hindsight most investors wish they’d had a portfolio hedge in place, a safe haven product, an asset that has returned on average 25% per year, even in the current economic climate.

Gold continues to dominate headlines and provide astounding returns.  Now even the most unsophisticated investor is aware of gold as an asset class, and has read about its benefits as a crisis hedge, inflation protection, and diversification tool.  But few are sure how to invest in it, and even the IFA community may not be aware of some of the tax free methods of investing into the physical metal itself.

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Pension Gold

One of the most obvious tax free gold investments pension gold. Gold bullion is the only precious metal which qualifies for Self Invested Personal Pensions (SIPPs).  There was so much media attention around A-day regarding property that Pension Gold seemed to slip under the radar. The consequence is that a few years on, while many SIPPs offer property products, few offer gold bullion. The fact that investors actually buy gold bars, rather than a paper asset, provides huge comfort that there is no credit exposure whatsoever.  We offer bars denominated in 1oz or 100g sizes to provide exceptional liquidity and store them in a licensed depository where it is fully insured by Lloyds of London. Like any other SIPP qualifying asset, gold bullion receives up to 40% discount through tax relief, and enjoys the usual sheltering from Capital Gains Tax.

Pension gold can be particularly appropriate for savers entering the final phase before retirement. The current economic downturn, and subsequent plunge in pension values, has demonstrated the exposure and lack of balance many pension investors have. When these nasty shocks occur shortly before retirement, there’s usually little time to recover, and many feel forced to delay their retirement in the hope of recovering portfolio values. An allocation in physical gold acts as a hedge against such events.

Pension gold can also play a vital role in a younger, more aggressive pension portfolio. It provides balance when teamed with property structures, high yield and emerging market assets.

Tax free gold coins

Other investors are buying physical gold outside of their pension.  They are choosing to use idle bank deposit money to invest in completely tax free gold coins.  Many customers are fed up with low bank returns which are not only taxed but also exposes them to the bank failing if they have over £50,000.  All investment gold is VAT exempt, and UK bullion coins are Capital Gains Tax free too as they’re classed as legal tender.   The most popular tax-free gold coins are the 1oz Britannia or the smaller Sovereign coin. Both provide a fantastic heirloom, as well as wise investment, and some customers opt for older Sovereigns to enjoy the added historical value.  All of the Tax free gold coins trade at a premium to the same size gold bar as they not only consist of the intrinsic gold value, but also a value linked to its design, rarity, and demand. Customers obviously maintain their premium over bullion bars when they come to sell.

If customers are making a modest investment, and therefore unlikely to breach Capital Gains thresholds, then they may opt for a well known foreign coin such as the Krugerrand. These are currently trading 2-3% cheaper than the equivalent Britannia.

Investors can actually take delivery of this gold and store it in a private safe or their bank’s safe deposit facilities, or opt to use the gold dealer’s storage facilities.  The coins are a simple, understandable, tangible investment, which provide a great contrast to the many complicated structured products on the market.

Regular Tax free gold investments

For those without lump sums to invest there are also ‘drip feeding’ accounts such as our Gold Savings. This provides an alternative regular savings scheme. Instead of saving every month or quarter in paper money, a Standing Order is set up and tax free gold coins delivered on a regular basis so clients gradually build a golden nest egg. With the huge threat of inflation with record low interest rates and Quantitative Easing, gold seems to provide great wealth preservation.

We have an extensive network of IFAs who place their gold products into the UK retail market through our Gold Advisers Program.  There is a huge role to play by the IFA community, to make customers aware of the various gold products on offer and that diversification is key to securing your customers’ wealth. Gold provides a unique balance due to its low correlation with other assets and due to its nature as a physical asset versus the traditional paper assets most people own.

Timing

Many of your client base may ask whether they’ve missed the boat with gold investment. While it is true that gold is at all time highs, it is also still a great time to start investing.  Many believe the gold price is at a tipping point and will provide 2-300% returns over the next 3-5 years.

Mining supply will be flat to negative over the next 10 years.

That is the timescale it takes from discovery to mining, so it provides transparency for supply. Secondary supply is plummeting as the usual main central bank sellers have become net buyers for the first time ever. Their holdings are up 40% this year.

Demand for investment continues to rise as retail awareness increases and significantly pension and hedge funds have sited physical gold as an integral part of their ongoing portfolios. Oil producing nations look to preserve wealth with gold rather than dollars, and industrial demand will undoubtedly increase when the world economy does eventually pull out of the mire, due to the metal’s use in electronics.

The economic environment also remains very supportive of further price gains. Most will agree that another few years of financial pain remains with record unemployment and record Sovereign debt levels.  The Dollar looks like losing its status as the world’s reserve currency, as the BRIC economies suggest benchmarking against a basket of currencies instead.  As a safe haven asset, gold will continue to shine.

When we do emerge from recession and start to grow, there is one final phantom waiting around the corner – inflation.  With global interest rates near to zero, huge stimulus packages, and the UK’s Quantitative Easing program, the likelihood of high inflation is very apparent.  With the value paper money set to be eroded, there is only one true store of wealth – physical gold.

Over the past few months we’ve seen the price of gold head higher. Just recently many investment analysts have predicted the price to continue its meteoric rise with $1,500/oz sited by year end and $2,000/oz within the next 18 months. Over the past decade gold has returned an average of over 25% a year. Yet, still only a small percentage of investors own physical gold, especially in the UK.

Total net investment in gold from start of 2010 through to July 31st was $2.7 billion. Yet, in the course of the same period, investors poured $22 billion into emerging markets mutual funds and $155 billion into bond funds.  In comparison to these numbers, the total amount invested into gold is negligible.

Portfolio mindset

So why are so many people ignoring the asset as part of their portfolio?

I certainly don’t think it’s due to a lack of awareness of gold. The press coverage over the past few years has been phenomenal. Most people are now aware that gold can be bought as an investment, and that it performs well as a safe haven asset. So surely that’s half the job done?

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The main barrier preventing the average investor buying gold is mindset.  Many modest

investors and savers still perceive gold as being elitist and out of their reach.  They don’t realise that you can buy a Sovereign coin for just over £200 or tiny gold bars for £50 or less!  Certainly the US retail market is at least 10 years ahead of the UK market in terms of the average person owning some gold as part of their portfolio. It’s only a matter of time before we catch up. Only a small fraction of UK investors have considered alternative assets at all. Most still stick to traditional paper assets such as stocks, bonds and cash. However, with huge losses from these assets over the past few years more people are now opening their eyes to the world of alternatives, including gold. More are now realising that a true balanced portfolio needs to include a wider range of assets.  Traditional currencies such as the Dollar, Sterling and the Euro are now threatened, so we are gradually seeing more savers using gold as a store of wealth rather than leaving all their liquid assets in a Sterling savings account.  But these are still in the minority, and most savers to still accept ISAs and savings accounts as the only options.

How to buy gold

The next mental block is a lack of knowledge in what to buy, how to buy gold, and where from.  While gold has been around for centuries, it remains a ‘new’ asset class to many. The first question novice investors ask us is should they buy gold coins, bars or mining stocks? The options are endless and many feel they don’t know who to ask to get the answers.

While awareness of gold in general is high, many of the people we speak to aren’t aware that certain coins are totally tax free in the UK, or that you can get 40% discount off the price of gold bars as part of a UK pension.  That’s not a surprise when so few Independent Financial Advisers (IFAs) discuss alternative assets with their clients. Many of the IFAs themselves weren’t aware that gold bullion could be bought with a pension.  This is part of the reason why we started the Gold Adviser’s Program.

When the pension parameters changed in the UK to allow some alternative investments into Self Invested Personal pensions (SIPPs), most of the press focus was on property. At the time buy-to-let properties were the thing to be in, with many modest investors becoming landlords. When residential property was widely touted to be included as permissible SIPP assets press coverage could talk of nothing else. This would mean investors could essentially buy a £100,000 flat at £60,000 once tax relief is factored in. At the last minute the Government performed a U-turn and only allowed commercial property with a SIPP. However by this stage gold had slipped under the press radar as the only commodity permitted into a SIPP. So pension gold really hasn’t been promoted in the UK. When our customers are made aware of the possibility they love the idea.

New processes

It’s also true that the average investor doesn’t know the buying process. How do I pay? Where do I store the gold? How do I know it’s real. These are some of the most common questions we receive. If you have the support and expertise of a good gold dealer then these sort of questions are easily overcome.  The buying process is as simple for gold as buying anything and once customers buy once they realise there is nothing radical about the investment process.  Finally, it’s human nature that investors want to buy at the lowest price and sell at the highest. This is the main investment strategy after all. So many are put off that gold is at all time highs. They feel they have missed the boat and are unsure of the best timing to add gold to their portfolio. As I mentioned at the beginning most experts feel gold has a long way to run yet and starting a relationship with a reputable gold dealer today will help you select the best buying opportunities and get the ball rolling with the new world of physical gold.

Is cash still king?

Despite most people thinking banks are through the worst of the credit crisis, 279 banks have collapsed since 25^th September 2008. That was the day Washington Mutual become the largest bank failure since records began. In fact bank collapses over the past two years eclipsed the previous six year period when only 35 banks were wiped out.

What can we learn from this? Well firstly we should realise that the banking crisis is far from over. While many of the UK high Street banks have been rescued by the UK Government, the Treasury are now under the rating agency spotlight to reduce the national debt. Any future cash injections will be far less forthcoming. So next time one of the lenders goes cap in hand for cash they may have to look elsewhere, or learn to become self sufficient.

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During previous economic downturns the traditional stance was that cash was king. If stock markets and property prices were choppy, simply keep the money in the bank.  There was never any doubt over the safety of that money. However the world we live in has changed. As a UK saver you are now only protected for £50k in each bank. If the bank goes under, you could lose money. A ridiculous notion 10 years ago but very realistic now. Indeed for those who invested into Icesave a couple of years back, they eventually got lucky and were repaid by the UK Government. The Treasury were convinced they’d be reimbursed by the Icelandic Government but the money never came. Such a future failure may this time fall on deaf ears.

Secondly due to the squeeze on the money markets and record low interest rates, returns for UK savers are around 1% or less. That is then taxed at their prevailing rate. When inflation of over 3% is taken into consideration you are actually making a negative return for the risk you hold that the bank may not survive to repay your capital!

That’s why we are now hearing more and more that cash is no longer king, gold is the new king.

One way of avoiding exposure to the banks, to Sterling, and to any counterparty at all is to move some of your savings sideways into physical gold. We’ve been trained throughout our lives to put money away in the bank but with changing times comes the need for changing strategies. There’s simply no need to hold all your liquid assets in Sterling based bank accounts any more.

Ongoing Terror Threat

This week intelligence officials intercepted  a credible Islamist-linked terror threat to the UK and mainland Europe.  The style of attacks would have been similar to the co-ordinated multi-hit attack on Mumbai where 170 people died two years ago. Indeed the Eiffel Tower has been evacuated twice in the past fortnight due to terror threats.

This news serves as a timely reminder that we live in turbulent political times. As well as the fear this strikes to personal safety it also has a major influence on the investment community.  It would only take one successful attack of this magnitude, whether it be from Islamic terrorists or indeed from North Korea’s nuclear threat, to send the already fragile markets into a tailspin.

Anyone with investments in many of the traditional assets such as equities,

bonds or even property would no doubt suffer huge loses as the markets respond to a major terror attack. Recovery in such a weak economic global economy would prove slow at best.

With a terror threat still very real, the case for owning physical gold in your portfolio is dramatically strengthened. As the ultimate safe haven asset gold provides the essential portfolio insurance against such market events.   When terror triggers equities to drop in value investors flock to safety, pushing the gold price upwards.

So many investors think of the gold price rising in economic downturns but forget how well it also performs during geo-political unrest. Most significantly it is the terror threat which is most unpredictable and can catch investors unawares.  By owning gold in its physical form (through gold coins or bars) the investor has no counterparty risk whatsoever so owns the ultimate security.

While few people would consider not having house or car insurance, few of us have in place ‘portfolio insurance’, leaving themselves vulnerable to unexpected market downturns.  This latest ‘near miss’ acts as a timely reminder to act now and move some liquid assets into physical gold before it is too late. Remember the old adage, ‘You don’t wait to buy gold, you buy gold and wait’.

Is it the right time to buy gold?

London, October 1  – While most retail investors now recognise the benefits of gold within their portfolio, many are now asking us at Physical Gold Ltd whether it is the right time to buy gold with the current price of around $1,000/oz.

To analyse this we need to look at two elements; the underlying gold price, and the GBP/USD exchange rate.

Firstly, with the $ spot gold price hovering around the $1,000/oz level, we’re pretty near the highest ever level of $1,023 achieved last year. Then, the magic $1,000 fixing was only achieved twice before the price fell away sharply. This year, there seems to be far greater support at this level, laying a good foundation to move onwards and upwards from here.

The fundamentals which support the gold price are still firmly in place. The world economy still has some time to run in its current cycle with record debt levels and unemployment, and increasing talk of the dollar’s status as the world’s reserve currency being threatened.

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Gold supply and demand

The supply/demand equation also continues to support the rise of the yellow metal.

Supply figures still remain limited, down for the 3^rd consecutive year, with predictions of further falls due to poor exploration investment. There was only 1 major new gold discovery in 2007 (defined as >2.0 million ounces), and none last year, which compares starkly with more than 15 a year being made a decade ago. This lack of new supply is exacerbated by the diminishing secondary supply due to more central banks hoarding and indeed building their gold reserves.

Demand on the other hand, was up 280% year on year for investment gold in the first quarter of this year, and continues to go from strength to strength in the current climate. With an increasing retail awareness of gold as an investment product with schemes such as Physical Gold’s SIPP partnership with Pointon York, we expect demand to remain robust. With limited supply and increasing demand, it could well be the right time to buy gold.

Even more poignant for a sustained gold run is the expectation once economies pull out of recession and into growth. Most literally, there will likely be an increase in industrial demand for gold, with its use in the electronics world. But it is the threat of inflation which will provide the most significant support for the gold price. With such a deep trough, and the associated size of the stimulus packages used to emerge from these, the ensuing growth  may succumb to inflationary pressures. While this would erode the value of paper currencies, gold provides a protection against inflation.

Our price target in $ over the next 6 months is $1,400/oz.

Sterling value

The other crucial element for UK investors to consider is the value of Sterling. While the $ price of gold may be testing new highs, the price in Sterling is not near its peak. Currently trading at around £620/oz, it hit a peak this year of £687/oz. This is due to Sterling strengthening earlier in the year on the back of optimists seeing ‘green shoots’.

However, the housing figures that stimulated this appreciation are now being overshadowed by the fundamental weakness of the UK economy and the Pound is starting to fall back, and consequently increase the price of gold in the UK. People are realising that the steady house prices are more indicative of a lack of housing supply than an economic recovery.

The fundamentals that Physical Gold believes will contribute to a weakening Pound are record unemployment, record borrowing, and a weakening Government under pressure.  There has even been talk of the Sovereign’s AAA rating being under threat, which would add further expense to our borrowings.  We feel all these factors will contribute to Sterling falling back further  against the Dollar.

Even more worrying, is the £200b of Quantitative Easing in the UK, already £50b over the original ceiling, with suggestions of another £25b injection to come.  Combined with record low interest rates, this provides the lethal cocktail for high inflation which will further fuel demand for UK gold to protect the value of savings.

We feel it is still the right time to buy gold for UK retail investors to provide balance to their portfolios.

Our price target for UK investors over the next 6 months is £900/oz.

Physical Gold Limited is one of the premier providers of physical gold and other precious metal assets in the UK. With headquarters at Tower 42, in the City of London, they can be reached on 020 7060 9992.

SOURCE: Physical Gold Limited