What your clients need to know about investing in gold responsibly

For centuries, gold was seen not only as a sign of wealth but also of security. Until recently, many nations tied their currencies to the gold standard as a means of stability. So, could investing in gold be a responsible and safe move for your clients in the face of recent market instability?

The billionaire hedge fund manager, John Paulson, once said: “In these times of uncertainty for paper-based currency, I feel more secure in holding gold”.

A quick glance at recent events such as rising inflation and interest rates as well as a weakening pound, might make it feel like a reassuring move to your clients to pursue investing any surplus funds they may have into gold markets.

But before they make any major decisions, your clients should ensure that investing in gold is the right move for them.

Read on to discover how your clients can approach investing in gold in a responsible way.

Investing in gold can protect your client’s money during periods of high inflation and market instability

During periods of high inflation, your clients can see the “real” value of their wealth erode over time as the cost of goods and services continues to rise.

According to the Office for National Statistics (ONS), annual inflation in the UK stands at 9.9% (as of 13 October 2022), which means that if your client purchased £100 worth of goods a year ago, those same goods would cost them on average £109.90 today.

Gold is a commodity and so doesn’t operate in the same way as currencies.

In many circles, gold is typically considered inflation-proof. As a rule of thumb, the price of gold rises when there is uncertainty or negative trends in other areas of the market such as in equities, bonds, or across the economy in general.

The dynamic isn’t definite, but it’s a common trend. This is why many gold investors choose to hold it as an asset in order to hedge against any potential losses in other areas.

Gold prices can be positively influenced by factors such as:

  • Consumer demand such as the jewellery trade
  • Low interest rates — gold prices often can move in the opposite direction to interest rates
  • Supply issues and whether recycled gold supplies are in decline
  • Geopolitical instability
  • Natural disasters such as earthquakes, floods, or hurricanes in third world countries, which can prompt affected nations to invest more of their wealth in gold and drive-up global prices.

The opposite of any of the above can have the reverse effect on gold prices.

The Royal Mint suggests investing in gold can be useful for some investors.

They use the example of an individual who bought £200 of gold in late 1990 (which would have got them an ounce) and separately saved £200 of cash. The gold would now be worth around 650% more while the cash would likely have been devalued by inflation.

Gold can be a safe haven for your client’s investment portfolio

A financial planner will likely advise your clients to diversify their portfolio to reduce risk. Gold can be a good way to achieve this goal.

As gold often rises in value when other markets fall, it can act as a life jacket for your client’s investments rather than something they should funnel all their funds towards.

Conversely, it should be remembered that when markets perform, gold may fall in value. It primarily acts as a solid safety net for your client’s greater portfolio.

Investing in gold is unlikely to return substantial gains in the short term. It is not an investment for individuals chasing returns or who are open to taking risks. It instead produces its best returns by simply being retained and allowing it to grow in value over the long term. It is often used as a “buy and hold” investment strategy.

Your clients can invest in gold physically or on the stock market

Purchasing physical gold doesn’t mean your clients should pop down the high street and visit their local jewellers. Investing in physical gold typically means acquiring gold bullion.

Physical gold bullion can be purchased through the Royal Mint, who can either deliver it to your clients or hold it in their vaults on their behalf.

Some gold coins that are produced by the Royal Mint such as the Britannia and the Sovereign, may be exempt from Capital Gains Tax (CGT) in some circumstances. It may be worth your clients seeking advice if they choose this route.

Exchange-Traded Commodities (ETCs) are essentially the commodity equivalent of Exchange-Traded Funds (ETFs). They are traded like stocks and shares on the market and can be cheaper than purchasing physical gold.

They can also possess benefits such as not needing to pay for the storage and associated insurance involved with physical gold. Although your clients will likely need to pay a fee to buy or sell on the respective trading platform.

Your clients could also choose to invest in gold-related industries such as mining companies or major global jewellers.

According to the World Gold Council (WGC), gold has performed well across 2022. The price has performed strongly against the pound in particular seeing a 12.2% return on investment in the year to July 2022.

It should be noted that there are disadvantages to investing in gold such as:

  • The potential to be hit with a CGT bill on any profits above the annual exempt amount
  • Gold is unlikely to outperform stocks on the FTSE on average and in the long term
  • Gold can have associated costs such as insurance, storage, and trading fees
  • Gold is likely to see its value drop as interest rates begin to climb.

As with any investment, a solid course of action is to seek professional advice before making any investing decisions.

Get in touch

Gold might seem like a solid investing decision, but it might not be the right move in terms of meeting your long-term objectives.

To figure out the best path forward for your portfolio and to meet your goals, please email mail@delaunaywealth.com or call us on 0345 505 3500.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.