At Balance: Wealth Planning, we are regularly asked about gold investing, including using this as a way of diversifying a pension. However, we would not recommend this strategy and would advise caution if you are thinking of investing into gold as there are pros and cons. In this article, we explain how gold investing works and why you need to be careful if you are considering this type of investment.
Pension gold investing explained
Historically, gold is perceived to be more resilient to inflation and able to preserve its value over the long term. Back in 2014, gold bullion was added to the list of standard assets approved by the Financial Conduct Authority (FCA).
As a result, many people started including gold through their SIPP (self-invested personal pension) or SSAS (small self-administered scheme). Funds to buy gold can be transferred through a SIPP or SSAS provider, and you can trade and sell gold through the Royal Mint.
The Royal Mint states that higher rate taxpayers could benefit from a large amount of income tax relief from buying gold in this way. They advertise having a “secure, onsite storage facility” and a “24/7 buy back facility”. Also, gold is exempt from Capital Gains Tax, which means it can grow freely without another added tax burden.
However, despite this seemingly solid form of investment appearing attractive in many ways, it’s wise to proceed with caution. When there’s market uncertainty or negativity relating to equities, bonds or the economy, the price of gold rises. Likewise, the price falls when there is positive market growth across these areas.
Gold can be affected by consumption demand (for example, jewellery), low supply (gold recycling), weakening currencies, and low interest rates. It can also be impacted by natural events and geopolitical instability. Overall, gold is generally a less reliable investment when compared to investing into the stock market.
The trouble with gold investments
There are various issues with gold investments, especially if you are considering this to diversify your pension. The following is a response from one of our financial planners:
“While the newspapers and articles will highlight the spot price, what you are actually receiving as an investor, the spot price doesn’t account for holding costs, transport costs, converting to local currency, etc.”
One of the main issues with gold is how to get access to it. Generally, for pensions, the only way to access a gold investment is through gold miners’ funds. The problem with gold mining funds is that gold miners are a leveraged play on gold.
Typically, gold miners use a lot of debt to pay for production costs. Therefore, what you usually see are funds that are up to 3x more volatile than the price of gold. As a result, investors end up adding volatility to their portfolios without the benefit of an added return.
Another factor is the cost of storing physical gold. Costs can be quite high when accessing through an Exchange Traded Fund (ETF), for example, because the gold needs to be stored in a vault somewhere.
Lastly, another big concern is the fact that it is currently the worst time to invest in gold. At the time of writing, gold prices are at an all-time high. If you bought gold at the all-time high in September 1980, for example, you would have been sat on a loss until around April 2006. Similarly, there was a high in 2010, which would have resulted in being sat on a loss until July 2020. Buying gold is a strategy for holding money, but not if you want to see returns.
Investment and wealth planning
If you are considering investing in gold, then we would urge you to speak to our team. There may be safer ways for you to invest your money, which could offer better returns. We have two ranges of successful in-house investment portfolios that are exclusive to our clients.
Balance: Wealth Planning is an award-winning financial planning firm. This year, we won Money Marketing’s Best Retirement Advice Firm and Next Generation Advice Firm.
For investment advice, please get in touch to speak to our financial planners.
Sources:
https://www.royalmint.com/invest/discover/invest-in-gold/including-gold-in-your-pension/
