Is it time to bolster your portfolio with a shield of GOLD?
Armor: Gold can help protect against inflation
In times of crisis, investors often look to gold as a safe haven for some of their long-term investments. However, despite its physical appeal and reputation for being a financial haven by storm, this precious metal is not guaranteed to make you money.
Ten days ago, when Russia rolled its tanks into Ukraine, gold prices immediately surged from $1,893 an ounce to $1,974 — a rise of more than 4 percent.
Although it then fell back, the price rose sharply on Friday as global stock markets fell in response to Russia’s seizure of Ukraine’s Zaporizhzhia nuclear power plant. The FTSE100 index fell nearly 3.5 percent while gold climbed back above $1,963.
Adrian Ash is Research Director at gold brokerage BullionVault. He says: “Investors should treat gold as an insurance policy against dire events and stock market crashes. But the ideal time to invest is before a crisis hits — not during a crisis.
“But it shouldn’t stop you from dripping money into gold over time no matter what’s going on in the world. It’s a good portfolio diversifier.”
Ash points out that the price surge has actually led to an increase in owners looking to sell as gold nears the peak it hit 19 months ago.
David Coombs is Head of Multi-Asset Investing at wealth manager Rathbones. He co-manages the Rathbone Total Return Portfolio with Will McIntosh-Whyte. This £377m fund is highly diversified – and has 5% exposure to commodities.
Last month it increased its gold holdings from 2 percent to 4 percent through exchange-traded fund iShares Physical Gold, a fund that tracks gold prices. Coombs believes it makes sense to hold gold as a “just in case” asset to hedge against future economic problems.
He fears a difficult year for the global economy with stagflation – stagnant economies and rising prices – a real possibility. Coombs says: “Anyone trying to make money from gold trading right now is either brave or foolhardy – there is so much uncertainty as a result of the tragic events that are unfolding in Ukraine.
“Russia, for example, could well sell some of its gold reserves to keep its economy afloat. This could cause the price of gold to fall. Alternatively, it could buy more gold to prop up the crumbling value of the Russian ruble. Nobody knows.’ This “just in case” view is shared by Jason Hollands, chief executive of wealth manager Bestinvest. He believes gold should make up a small percentage — maybe 5 percent — of anyone’s investment portfolio. He sees it as a hedge against future turmoil in global stock markets. He says: “The perception of gold as a safe haven comes from being something tangible, something you can hold in your hands. Something valuable in troubled times.”
Like Coombs, Hollands believes the best way for investors to put money into gold is through an exchange-traded fund, which is listed on the London Stock Exchange and tracks the price of gold. This means that an investor does not have to pay for their physical storage. Gold funds investors should look at include Invesco Physical Gold, Wisdom Tree Physical Gold and iShares Physical Gold. The respective annual fees are 0.12 percent, 0.39 percent and 0.14 percent.
Ruffer Investment Company is a £768m investment fund managed by Hamish Baillie and Duncan MacInnes. His focus is capital preservation and he invests in a mixed bag of assets.
In December last year, it increased its gold stake from just over 5 percent to 8 percent — and still thinks it’s an attractive investment.
MacInnes says, “Some investors seem to have fallen out of love with gold, and many are turning their attention to the shiny new attraction of cryptocurrencies like bitcoin. But we still think it has great appeal.
Troy Asset Management runs the £1.8 billion Personal Assets Trust, which holds 9 percent of its portfolio in bullion. Fund manager Sebastian Lyon cites a key reason for this as “preservation of capital”. He worries that potential high inflation this year could hurt the value of stocks and shares by hurting corporate profits. Gold is seen by Lyon as a good hedge against rising inflation.
Coombs believes gold isn’t the only precious metal investors should invest in. He says other things to consider are silver, palladium, platinum and silver.
“Think about what you want to keep in a safe deposit box if the financial system collapses,” he says. ‘Gold may still be at the top of the list, but you may want to have other metals in your portfolio as well.’
In the last 12 months the value of gold has risen by 12 percent in sterling terms. Over the same period, silver prices are down 3 percent to $25 an ounce, while platinum is down 10 percent to $1,050 an ounce.
A jump in prices could be due for these metals. Only palladium has risen in price — like gold, which is up 12 percent over the past year to $2,610 an ounce.
Although silver is coveted for jewelry, it also plays an important industrial role in the manufacture of electrical contacts and batteries.
Platinum is valued by jewellers, but like palladium it is also used to make catalytic converters.
Exchange traded funds that offer investors exposure to these metals include WisdomTree Physical Silver, Aberdeen Standard Platinum Shares and iShares Physical Palladium. The respective annual fees are 0.49 percent, 0.6 percent and 0.26 percent.
Mining stocks like Rio Tinto, Barrick Gold, and BHP Group are also worth checking out — especially given the attractive dividends they pay investors. Rio Tinto recently announced a record dividend for 2021.
Mining stocks are not without risk as investors increasingly scrutinize environmental, social and governance issues. Hollands says: “The costs of extracting gold and other precious metals can be enormous.
When prices go up, the subsidy economy works. If they fall, they don’t. Also, some mining companies have a poor track record of caring for their employees.’
Hollands believes investors should look at mutual funds that have some exposure to mining stocks — such as BlackRock Gold & General (annual fees of 1.17 percent) and JPM Natural Resources (0.9 percent).
How to buy and store your bars, karat or coins
If you want to physically own gold, the best way to buy gold is online or by calling a bullion dealer. You can also save it on your behalf.
The price an investor pays is determined by the “spot price” of a troy ounce of gold. This is the median price at which gold is bought and sold. Gold is traditionally measured in dollars as that is the world’s dominant currency – but bullion dealers still price in British pounds for UK investors.
A troy ounce is slightly heavier than a normal ounce – 31.1 grams versus 28.35 grams. Adrian Ash of Bullion Vault says: “Investment gold is traded in bars. Most people think of the big gold bricks in a James Bond film like Goldfinger, but you can also invest in fractions of one.’
All that glitters: If you want to physically own gold, the best way to buy gold is online or by calling a bullion dealer
A 24 carat bar – as defined by the London Bullion Market Association – weighs 400 troy ounces, so weighs around 12.4kg and can cost in excess of £580,000. But it can be sold in fractions of just a gram for around £50.
Unfortunately, the commission that bullion dealers take on sales is rarely advertised openly – so you’ll have to calculate it yourself. Websites like the Royal Mint give the latest spot price for gold. You can then look at the price at which bullion dealers are willing to sell – the actual difference is their fees.
Dealers such as Baird & Co, Chards, Pure Gold Company and Royal Mint receive a discount that is between 2 and 5 percent of the spot price. For example, Chards sold an ounce of gold bars last week for £1,473 at a spot price of £1,423 – a 3.5 per cent fee.
Another aspect is the storage costs. While you may prefer to keep gold at home, it is far safer if it is kept under lock and key in a secure vault. Ash says, “Keeping your gold in fully insured storage makes trading easier – you can buy and sell without touching the gold.”
BullionVault charges a minimum of £36 per year – or 0.12 per cent of the value of the gold stored. Baird & Co charges 0.35 percent, while Chards and Royal Mint both charge 0.5 percent. The Pure Gold Company uses an outside storage company called Loomis, which charges 0.65 percent.
The purity of gold is measured in carats. Investment grade gold bars are 24 karat and are at least 99.9 percent gold. But this purity means it is soft and malleable. Investors might consider investing in gold coins like the Sovereign, which is 22k but easier for everyday use. Another important coin is the 24 carat Britannia.
You do not have to pay VAT on investment gold such as bars and coins. The Sovereign and Britannia coins are also considered legal tender – denominated in £1 and £100 denominations – and are therefore exempt from capital gains tax. The greatest value of these coins is the gold they contain. Investors should be wary of paying too much for a “special edition” gold coin. Just because you have an aesthetically pleasing collectible coin doesn’t make the piece a valuable investment.
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