Gold can be a big deal for small investors, but nothing is certain

The precious metal looks tempting.
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Powered by Guardian.co.ukThis article titled “Gold can be a big deal for small investors, but nothing is certain” was written by Harvey Jones, for The Observer on Monday 8th August 2016 06.00 UTC

As the Chinese economy began to lose steam this year and there were continuing concerns about the health of global banking, Laura and Simon Delow focused on their investments for the future. Seeking security in case their other pension plans went south, the pair sank £40,000 into gold – an investment popular in times of crisis – which turned out to be a shrewd move before the Brexit referendum at the end of June.

“We see the price rising considerably due to global economic instability, particular in the banking sector,” says Laura, 59, a semi-retired financial consultant. “We may now buy more due to Brexit uncertainty.”

In investment terms, gold has had a very successful decade, mostly fuelled by a spike of more than 25% this year. In the past 12 months its rise has exceeded UK house prices, the FTSE 100 and Bank of England one-year fixed-rate bonds.

The Delows’ investment in gold sovereigns, held in a vault by the Pure Gold Company, was to hedge risk elsewhere in their retirement savings, as the precious metal tends to rise in troubled times when other assets are falling.

Laura says she would not be too worried if the price fell in future. “In fact, I would be delighted, as this would suggest the global economy is more stable, which means our other investments should rise,” she added.

In the immediate panic after the Brexit result, its price soared at the fastest-ever rate against the pound. Last week, it traded at $1,367 an ounce, almost 29% higher than its price at the start of this year.

Not always Midas

So should gold be bought as an investment? While some experts have tipped it to rise even further, investing has many perils with prices which can fall sharply. During the eurozone crisis of August 2011, it flew to more than $1,900 amid speculation it could top $3,000. Instead, it fell steadily to just above the $1,000 mark, before this year’s sparkling recovery.

Demand surged in the run-up to the EU referendum, with the Royal Mint’s online trading platform reporting a 32% increase in people snapping up coins and bars in June, even before the result was announced.

“The speed of investment is unprecedented and the types and range of investor are more diverse than we have experienced, including teachers, doctors, property developers and solicitors,” says John Saul, chief executive of The Pure Gold Company. “Retirees are also buying because their pensions have been hit by market volatility.”

He adds that its UK clients are primarily buying gold sovereigns and Britannia coins, which are exempt from capital gains tax.

There are good reasons why investors are lusting for gold: Brexit, the Italian banking crisis, Chinese uncertainty, spiralling global debt and Donald Trump. The danger, as ever, is that private investors end up buying at the top of the market, only to see the price collapse as sentiment swings.

Just for the wealthy?

Darius McDermott, managing director of fund platform Chelsea Financial Services, says gold divides investors. “Some love it, some hate it. Gold does not pay interest, unlike dividend stocks, bonds and cash, so you do not benefit from compound growth over time,” he says.

On the other hand, gold offers “negative correlation” with stock markets and other assets: “If they fall in value, gold tends to rise, which can be used to offset losses elsewhere in a portfolio. Unlike pounds, dollars, euros or yen, the supply of gold is ultimately finite. Many find that attractive amid today’s global currency wars and rampant money printing.”

You don’t have to be super-wealthy to get exposure to gold. In fact, you don’t even have to buy physical gold.

Retired couple Paul Gosling, 68, and wife Jill, 67, who live in Hereford, sought the security of gold in the immediate aftermath of Brexit, when the pound and gilt yields tumbled. Their advisers, Chelsea Financial Services, suggested switching some of their retirement savings into a fund which invests in gold mining stocks.

“We thought it seemed a good idea to invest a few thousand pounds in precious metals to offset today’s volatility,” Paul says.

The fund has risen 158% over the last year, according to figures from Trustnet Direct, but there is no guarantee it will rise so rapidly in future (in fact, over five years it is down 10%).

Laura and Simon Dellow: ‘We see the price rising considerably due to global economic instability.’
Laura and Simon Dellow: ‘We see the price rising considerably due to global economic instability.’

Buying physical gold is not all about 1kg bars. A 1g bar can be bought for as little as £40 or gold coins from a few hundred pounds, though investing in such small amounts may be more pleasurable than profitable.

“Dealing costs, handling charges and delivery fees can quickly eat up any profit you make from the rising gold price,” says Adrian Ash, head of research at Bullion Vault. “If you hold more than a few thousand pounds [at home] you are likely to invalidate your household insurance, or will have to pay an extra premium and install security measures.”

Bullion Vault’s 60,000 customers own the gold they buy, but it is held in vaults in London, Zürich, New York, Toronto or Singapore. Maximum trading costs are 0.5% and there are also storage costs. On average, customers hold £30,000 of gold, though most hold smaller sums.

“We processed trades worth £30m on the Friday after the Brexit referendum, our record day. Not everybody was buying, some were taking profits,” says Ash.

Beware the gains

In the last year, the LBMA Gold Bullion index has risen 35% against 5.35% for UK house prices, a total return of 2.51% from the FTSE 100 and 1.10% on Bank of England one-year fixed-rate bonds.

It has glistered over 10 years, rising 177% against 69% on the FTSE 100, 41% for house prices and 32% for bonds. Over 20 years it is also first, up 301% against a total return of 251% on the FTSE 100 and 121% on bonds.

But John Blowers of Trustnet Direct sounds a warning: “Gold has performed well lately but investors must understand there is plenty of volatility along the way, and recent successes could be reversed.”

Getting into gold

■ Although physical gold can be bought from the Royal Mint in volumes as small as one gram, the tiny amount can be expensive to process.

“It currently charges around £58.61 for a 1g minted gold bar, well above today’s market price of around £32,” says John Blowers, head of Trustnet Direct. “You can buy a 100g bar for £3,388, which works out as £33.88 a gram, much closer to today’s market price. It therefore makes sense to buy larger bars as you get more gold for your money, though you will then have to consider how to store it safely.”

Prices vary. For example, Sharps Pixley sells a 1g Degussa gold bar for £40.60, or a 100g ingot for £3,290. Chard sells a 1kg bar for £32,975. You can also buy a part-stake in a bar, gaining legal title to the gold without taking delivery, Blowers says. “It is stored in a safe location and you pay a small administration fee every year, typically around 1% of the average value of the bullion, plus VAT.”

Another option is coins, which can be things of great beauty. The Royal Mint sells the Sovereign 2016 Gold Bullion Coin for £268.10 with the price falling the more that is bought, so 50 coins will cost £254.90 each. Prices vary depending on the coin – London bullion dealer ATS Bullion currently charges £1,048.40 for a Britannia 1oz 2014 gold coin, and £1,033 for a Krugerrand 1oz coin.

Lawrence Chard, founder of Blackpool-based bullion dealer Chard, says 1oz gold Krugerrands and Britannias are particularly popular. “They carry the lowest premiums, particularly when buying in bulk, and attract the highest buy-back prices. They are also free of capital gains tax,” he says, adding that sovereigns are also sought after. “These were used until 1932 and are still one of the most popular and collectible gold coins today.”

■ Rather than buy physical gold you can get exposure to price movements by investing in a low-cost exchange traded fund (ETF), sold by most online fund platforms, independent financial advisers and stockbrokers.

“The Physical Gold ETF is a simple, cost-efficient way to access the gold market by providing a return equivalent to the movements in the gold spot price, with an annual management fee of just 0.39%, plus and dealing charges,” says Blowers.

You could buy into an investment fund that targets gold and other commodity stocks, notably as BlackRock Gold & General. This fund is up an impressive 120% over the last year, but a mark of its potential volatility is that it is 27% lower than five years ago.

■ You can buy gold mining stocks such as UK-listed Fresnillo and Randgold Resources from an online broker. Their share prices have soared – Randgold is up 124% over the last year – but you are exposed to the company’s individual fortunes as well as the gold price; recent strong growth could make it a risky time to buy.

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