Gold: A Good Tax Efficient Investment?

Your Money

Tahmina Mannan

We take a look at the performance of physical gold since the start of the financial crisis.

With the ISA deadline rapidly approaching, all focus is on where savers should be putting their money.

But an ISA is not the only tax-efficient place for your money.

One option which is growing in popularity is buying physical gold.

According to the World Gold Council, demand for bars and coins accounted for 79% of gold demand in general last year, making physical gold significantly more popular among savers than investing in gold equities such as mining companies.

Physical gold has performed well compared to stocks and shares ISAs over the past few years, and has always attracted interest during times of economic uncertainty.

True, ISAs are the traditional go-to for people who want to protect their savings from the taxman – a recent report highlighted that if you had squirrelled away the maximum amount into these wrappers since they launched in 1999, you would now have a tidy £60,000 to play with.

But if you are nervous about investing in the stock market and cash ISA rates are leaving you less than enthused, investing in physical gold could be a good alternative.

Daniel Fisher, CEO of gold dealer, Physical Gold, says: “Buying gold is another easy way to keep the taxman’s hands off some of your money. Not only is holding physical gold tax-free, but there are no limits to the amount of money you can put in, unlike ISAs.

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“Gold still provides a safe haven and many people find it useful to have it in their portfolio to balance risk. Plus, with annual average returns of around 39% it has comfortably out-performed equity ISAs.”

Gold is typically thought of as a safe haven against volatility in the money markets and has the tendency to see people flock to it during times of uncertainty, be it wars or economic downturns.

Demand from China and India has helped prop up the gold market over the years, as the metal is used to celebrate and give as gifts.

Catherine Raw, co-manager of the BlackRock World Mining Trust, says the price of gold has seen a boost in recent months because of the Chinese New Year: “It may be the Year of the Snake, but demand for gold and the price traditionally climbs up ladders ahead of the Chinese New Year.

“Gold has a strong cultural affinity in both countries and is traditionally given as a gift. In China, this has gathered momentum, as people have benefited from a robust growing economy and rising middle classes with access to larger disposable incomes.

“In the last six years, volumes traded on the Shanghai Gold Exchange have increased by more than 2.5 times, suggesting this is a growing trend.

“This evolution has occurred during a period where investors have sought out both the safe haven qualities of gold during periods of currency debasement and economic uncertainty and for its diversification benefits.

“These attributes have attracted both individual investors and central banks to the yellow metal, which when coupled with only modest supply growth from the gold industry has propelled it to outshine most other asset classes over the past decade, returning 384%.”

There are three main ways to invest in physical gold.

You can add it as part of your Self-Invested Personal Pensions (SIPP) – which has a tax relief up to 40% for higher rate tax payers; you can buy gold coins – certain coins are VAT exempt and Capital Gains Tax free, because gold is legal tender; or some dealers will sell gold as part of a ‘gold accumulation account’ where you can save monthly or quarterly for gold coins. There is often a minimum investment per month, typically the price of one coin and no upper limit, unlike ISAs.

Fans of gold say that the supply of gold is restricted because there have been no major discoveries of gold mines in five years.

Many also argue that gold is not tied to the economy or a currency, nor is it correlated to commonly held assets such as property, cash stocks and bonds, as well as not relying on an underlying company to derive its worth.

Gold’s tangibility coupled with intrinsic value is probably what has allowed it to retain its ‘Armageddon insurance’ status, often acting as portfolio insurance should the bottom fall out of markets. So any volatility elsewhere tends to be favourable for the gold market.

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Catherine Raw thinks that the long term trend of growing demand coupled with challenged supply is highly supportive of a rising gold price: “We expect that a growing economy and rising incomes in China will contribute to demand in the region continuing to grow.”

Buying physical gold can present storage and insurance problems. However, coins are portable and easily stored. But the storage fees of gold are often lower than the management charges of most funds.

Gold also does not produce any income, interest or dividends – essentially, it just sits there until the investor chooses to cash it in. The price of gold therefore depends solely on demand and supply and how much people will pay for it.

Price fluctuations can be unpredictable, particularly if large institutional investors pull out leaving supply outstripping demand. If this happens, there is a risk that retail investors who have bought nearer the top of the market will lose a substantial amount in the value of their gold.

Following gold’s last peak in the 80s, the price of gold fell by 65% in less than two-and-a-half years, and it took over 28 years for that absolute price to get to the same place again.

If you do want to hold a small part of your investment portfolio in gold whether by investing in gold bullion as a physical asset or gold mining shares, either directly or through a managed fund, make sure you go through a reputable dealer or manager.

Gold significantly outperforming most other tax-efficient investments

Popular ISA investment returns:

Invesco Perpetual – Income – 37.24% – 1.5% per year
M&G – Corporate Bond – 26.22% – 1% per year
Legal & General – UK Alpha – 38.67% – 1.5% per year
Virgin – FTSE all share tracker – 33.14% – 1% per year
Physical Gold – Gold Accumulation Account – 48.05% – None

Equity ISA rates from Moneysupermarket – correct as at 19 February, 2013

Investors considering physical gold as an investment option can get more information on latest trends and demand staistics, as well as accredited dealers, from the World Gold Council.