What is Gold Investment?

In today’s ever-changing economic landscape, finding ways to diversify your investment portfolio is crucial.

Gold has proven itself time and time again as a reliable asset, holding its value even in the face of economic uncertainty. As inflation continues to rear its head, UK investors eagerly seek ways to safeguard their hard-earned money. And gold investment might be the answer they’ve been searching for.

Now, if you’re a seasoned investor, you probably already know the ins and outs of the investment game. But it can be rather confusing for those who are just starting out.

Before you take that first step into the world of gold investment, you need to understand what it is and why it’s so incredibly appealing.

Once you soak in all the information, you’ll be well-equipped to navigate this exciting new terrain.

There are two key reasons investors allocate a portion of their portfolios to gold:

Hedge Against Inflation

Gold has historically maintained its value over the long run, unlike paper currencies, which are subject to inflation and loss of purchasing power. This makes it especially appealing in inflationary environments.

It is common knowledge that investors always turned to gold during times of economic turmoil. As a result, gold investments are perceived as a safety net to hedge risks. Our world has seen unprecedented economic adversity in the last two decades. The sub-prime housing market crisis that unfolded in the US during 2008 spiralled into a full-blown economic disaster for the world. At the peak of the crisis in 2011, gold reached an all-time high, crossing the $1900 barrier per ounce. This resulted from scared investors moving their money to gold, spiking the demand for the yellow metal.

Similarly, there have been several geopolitical factors that have created adversity in the world. Over the last decade, there has been Brexit, the fallout of the US-China trade war, ballooning government debts across developed nations, and the COVID-19 global pandemic, when gold prices have crossed the $2,000 mark. Now, there is a war between Russia and Ukraine, which is threatening to have long-term repercussions for the stability of the global economy. Following Russia’s invasion of Ukraine in 2022, the prices went beyond $2,000 again.

Diversification

When planned properly, gold investments can provide much-needed balance to your portfolio and protect you against economic adversity. The term ‘balance’ refers to a diversification of your investments across asset classes, resulting in a healthy spread of risks.

This means that a sudden collapse of the global stock markets may impact a part of your financial portfolio that has exposure to equities.

But your entire portfolio won’t take a hit, especially since precious metals, like gold, do not have the same market dynamics as global equities. Gold prices often move independently of stocks and bonds.

Adding non-correlated assets like commodities and precious metals helps reduce overall portfolio risk through diversification.

Gold prices are driven by basic supply and demand factors. On the supply side, mine production accounts for the largest source of gold. Recycling of existing gold also contributes to market supply.

On the demand side, jewellery fabrication accounts for the largest share of annual gold demand globally. However, investment demand is an important factor influencing gold prices. Other key demand drivers include technology/electronics, dentistry, and central bank reserves.

Unlike fiat currencies, which can be printed without limit, the existing above-ground stock and new supply of gold is finite. This scarcity helps support gold prices in the long run.

Gold investment can take several forms. The most obvious is to purchase physical gold coins and bars. Gold investment can also be achieved through buying Gold ETFs, gold mining shares, and gold mutual funds. Generally, the aim is for capital appreciation in line with the gold price and to profit from selling the gold at a higher price than when bought. As well as outright profit, motivations for investing in gold can be to provide balance and protection to other assets and as a store of wealth to beat inflation.

There are several ways investors can gain exposure to gold. Let’s explore the three main investment vehicles available.

1. Physical Gold

Investing in physical gold involves buying bullion in the form of gold bars or coins. Popular sizes of gold bars include 1 ounce and 1 kilogram. Gold coins like the British Gold Britannia or Canadian Gold Maple Leaf are also commonly purchased by investors.

The main benefits of physical gold include:

• Tangible physical asset that you can hold in your hands
• No counterparty risk
• Liquid asset that can be easily bought and sold
• Protects against inflation and currency debasement (when the precious metal the currency is made of is mixed with a metal of inferior quality or value)

However, physical gold does come with costs like insurance, shipping, assaying, and secure storage.

Authentic gold bars always have a manufacturer stamp on the face

Before adding gold to your investment portfolio, it’s important to consider both the potential benefits and drawbacks.

Advantages

Liquidity – Gold is highly liquid, with well-established markets for buying and selling. This allows investors to easily convert gold into cash when needed. A smart gold investor will buy popular coins and bars which are easy to sell.

Intrinsic Value – The value of gold comes from its coveted properties, scarcity, and difficulty to find/mine. This is different from currencies, which derive value from government decrees.

Inflation Hedge – Gold has historically risen in price along with inflation, helping preserve purchasing power over long periods.

Portfolio Diversification – Gold provides non-correlation benefits when added to a portfolio of stocks and bonds. This can potentially lower overall portfolio risk.

Safe Haven Asset – During times of economic, political, or social strife, gold has served as a store of value and hedge against tail risks.

Disadvantages

No Yield – Gold does not generate dividends or interest like stocks and bonds. The only potential gains come from price appreciation.

Storage Costs – Holding physical gold requires safe storage arrangements, which come at a cost. Storage fees can eat into long-term returns.

Volatility – While less volatile than equities, spot prices of gold can exhibit sharp swings at times driven by shifts in sentiment.

Tax Treatment – Capital Gains Tax may apply to profits from certain gold investments like ETFs and mining shares. Physical gold coins/bars in the UK are exempt. For the tax year 2023/24, the tax-free allowance is £6,000 and is expected to fall to £3,000 in the following year.

Overall, many investors find the diversification benefits of gold outweigh the potential drawbacks. A 5-10% allocation is typical in a balanced portfolio context. However, the optimal gold allocation depends on your risk tolerance and investment objectives.

For UK investors looking to add gold to their portfolio, here are some steps to get started:

Research

To be a successful investor, you must select the right type of gold investment based on your personal objectives. For example, if you want to make quick gains by timing the market, electronic gold investments in the form of ETFs could be the right avenue for you. If you are planning to build a strong precious metals portfolio, then you must consider attributes like liquidity, value, divisibility and variety, which can have a significant impact on your portfolio.

Learn about the different ways to invest in gold and the risks involved. Useful resources include financial websites, books, magazines, and a trusted financial advisor. Understand how gold may fit into your overall investment strategy and asset allocation.

Also, research the gold supply and demand trends. Factors like jewellery demand, central bank purchases, and mining output help shape the investment case for gold.

Choosing the Right Investment Type

Choose the gold investment type that aligns with your risk tolerance, time horizon, knowledge level, and preferences for physical ownership. Popular options are physical bullion, gold ETFs, gold certificates, and mining stocks.

Younger investors with higher risk appetite may opt for mining equities, which provide leveraged exposure to gold prices. Older, more conservative investors may prefer physical coins/bars or gold ETFs.

Making the Purchase

Once you decide on an investment type, it’s time to make a purchase. When buying physical gold, only deal with reputable dealers with fair commission rates and buyback policies. For paper gold, execute trades through regulated brokers or fund platforms.

For physical bullion delivery, transport and insurance costs must also be considered. You also need to budget for any applicable storage fees to hold your gold securely over time.

Use our automated portfolio builder to get suggestions based on various investment objectives.

Gold has long been valued as a portfolio diversifier and hedge against tail risks. While volatile at times, its historical performance during periods of high inflation and geopolitical strife makes it appealing for UK investors seeking an alternative store of value.

There are several ways to gain exposure to gold in your portfolio. Each option carries different risks, costs, and benefits that should align with your personal investment goals and preferences. Perform ample research, understand your motivations for owning gold, and choose the right investment type for you.

With prudent allocation and a long-term investment horizon, adding gold to a portfolio of stocks and bonds can potentially enhance overall returns while lowering risk. This makes it worth considering as part of a balanced investment approach.

Start your gold investment journey today by educating yourself on the market and evaluating your optimal gold allocation. With patience and realistic return expectations, incorporating some gold can act as an insurance policy for UK investors navigating today’s volatile markets.

Talk to the gold experts at Physical Gold and make the right choices

Our gold investment experts at Physical Gold can offer you impartial, effective and practical advice when it comes to making the right choices for your gold investments. Call us now on (020) 7060 9992 or connect with our team.

Gold investing may seem complex to newcomers. Here are answers to some frequently asked questions to help demystify the process:

Are Gold Investments Good?

Gold has historically been an excellent portfolio diversifier and hedge against inflation and market downturns. Many financial experts recommend keeping 5-10% of your portfolio in gold. However, it should be just one part of a diversified investment strategy.

How Does Investing in Gold Work?

You can invest in physical gold like bullion and coins, which you own directly. Other options are securities like ETFs, mutual funds, and mining stocks, which provide indirect exposure. Each approach has different risks and benefits to consider.

Is It Worth Buying Gold in the UK?

UK investors have several good options for allocating to gold. Buying British gold sovereigns and Britannia coins is one popular approach. Gold ETFs listed on the London Stock Exchange also provide liquidity and tax advantages.

What Is the Best Type of Gold to Invest In?

There is no single “best” gold investment. Your optimal option depends on investment goals, time horizon, risk tolerance and preferences for physical ownership. Many advise holding a combination of physical gold coins/bars plus gold ETFs and mining stocks for diversification.