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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.
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.
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.
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.
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.
Daniel Fisher formed physical Gold in 2008, after working in the financial industry for 20 years. He spent much of that time working within the new issue fixed income business at a top tier US bank. In this role, he traded a large book of fixed income securities, raised capital for some of the largest government, financial, and corporate institutions in the world and advised the leading global institutional investors. Daniel is CeFA registered and is a member of the Institute of Financial Planning.