1. Long Term price

Gold is a great investment for the long term and has been the best-performing asset of the 21st century. There are always going to be fluctuations in the price of gold within shorter time frames, but patient long-term investors have enjoyed an upward trajectory for centuries.

Forecasts by analysts, investment banks and gold investors cover a wide range of outlooks, but many expect the price to continue to rise this year. With prices in December around $2024 an ounce, UBS analysts forecast $2,100 by year-end 2023 and $2,200 by March 2024.

Globally the World Gold Council’s  2024 outlook for gold is a mixed picture, with demand being driven by the wider economic environment. The gold body believes that if the global economy deteriorates and the risk of recession increases, more people will turn to gold, supporting a rise in price. With heightened geopolitical tensions in a key election year for many major economies, outcomes for the global economy are uncertain.However, if there is a ‘soft landing’ and a US recession is largely avoided, gold could remain ‘neutral’.

This outlook only incorporates a short-term view at the start of the year. Investors should recognise that there are many factors affecting the gold price while acknowledging that the trend is upward over the longer term.

2. The foreshadowing of recession

The global inflation crisis appears to have peaked, with price rises slowing in many developed nations. However, in order to put the brakes on rampant inflation, interest rates around the world have been rising at their fastest pace in decades. This means the rising cost of goods is being compounded by the rising cost of debt. Mortgage costs are surging, and the effects will be felt for some time as these costs only flow through to consumers when their fixed terms come to an end.

In the UK, 1.4 million people came off of fixed mortgages in 2023, according to the Office for National Statistics, and the Bank of England raised rates for the 14^th time in August. The fallout of the mortgage rate rises is just finally filtering through. House prices fell at the their fastest annual rate in 14 years in July, down 3.8% compared to the previous year according to Nationwide. And the impact is spreading beyond consumers to businesses as well. The S&P Purchasing Managers Index, which measures the performance of the manufacturing sector, has been below 50 for 12 months, indicating a slowdown in activity, and in July recorded its lowest level this year.

A recession, or even very low growth, can have a negative impact on markets as companies hold off on investments or even go out of business. During these times of market uncertainty, investors look to protect their assets with safe-haven investments like gold that tend to rise when other assets are falling.

3. Shaky Alternatives

For years most saving accounts offered practically no interest. Now that interest rates are on the rise, savings accounts are paying more than the near 0% they paid when rates were so low for so long. Easy access accounts can pay up to around 5% and fixed or regular saving accounts (with restrictions) can be found for up to 7%. But this still won’t beat out current inflation levels. The Consumer Price Index was 7.9% and the Retail Price Index (which includes mortgage interest payments) was 10.7% in June.

Property investment is a very risky option at the moment. The rapid and steep rise in mortgage rates, reduction in mortgage offers, and increase in mortgage repayments are all conspiring to depress the property market, pushing prices down at their fastest rate in 14 years. The number of homeowners coming off very low fixed rate deals in the next few years will only exacerbate this situation. A glut of sellers coupled with buyers struggling to secure mortgages with interest rates at multi-year highs, means the outlook for the property market is very uncertain.

Equities are at a similar level to this time last year, but this belies the volatility that has impacted the markets over the past year. This volatility could continue as the economic stresses of a potential recession and yet another rate rise put more pressure on consumers and businesses. Trying to call the top or the bottom of the market is a fool’s game, but holding a diverse portfolio of assets allows investors to spread the risk.

When markets are falling, gold is often rising as investors look for a safe haven during uncertain times. Gold is also more liquid than property assets, and while it doesn’t pay interest, the long-term growth trajectory offers the possibility of outpacing inflation, whereas cash in the bank is guaranteed to lose some value.

4. Diversity

The number one rule of investing is to diversify your assets. This can be taken to mean investing in different types of stocks and companies, but that won’t protect you when the entire stock market is shaken by global events like a pandemic or recession. So, it’s also necessary to diversify the types of assets in your portfolio, which means considering stocks, bonds, property, commodities and alternative assets as well.

Gold is a prime diversifier. It’s important because it is viewed as a safe-haven asset, so it tends to rise when other investments are falling. Because its value often moves conversely to other investments, it can bring protection when markets turn – so including gold in your portfolio can lower your overall risk profile. In addition, as a commodity, it tends to rise alongside the price of goods, which can help to hedge against inflation.

5. Tax Savings

We all have to pay tax on our income, including any gains we make on investments; such as savings, equities, bonds and property, but physical gold is an exception. When you invest in tax-free gold you can legitimately avoid paying tax on your gains, depending on individual circumstances. It’s a very similar product to an ISA but with none of the restrictions or penalties on early liquidation. Furthermore, you are able keep and control your investment. Many people use physical gold as an efficient form of tax planning, to minimise inheritance tax too.

Physical gold and silver demand has been increasing at The Pure Gold Company as concerns about the economy continue to grow. Central banks are buying gold, and the outlook for the precious metal is positive. Countries and retail investors are all turning to the precious metal and many analysts are predicting a rise in gold prices this year. There are so many uncertainties in our economic and political landscape; investing in gold is a tried and tested, tax-efficient way to protect and grow your wealth.

Discover all there is to know about buying gold for investment:

• How to invest in gold
• Timing and pricing considerations
• Our Buy Back Guarantee

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Gold: The Precious Metal of Kings

Gold has long been a symbol of wealth and royalty. With gold at near record highs of over £1600, £10,000 would only buy a little more than 6 ounces of the precious metal. Six 1-ounce coins like the Britannia or Sovereign would fit into a small jewellery box, nestling easily among the other presents under the Christmas tree.

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Frankincense: A Fragrant Offering

Frankincense, a resin obtained from Boswellia trees, was highly valued in the ancient world for its aromatic properties and use in religious rituals. Today it is still used in some religious ceremonies, as a fragrance in soaps, perfumes and lotions, or as an essential oil in aromatherapy. The price depends somewhat on the size of the resin pieces and the type and colour of frankincense. Smaller pieces  of the amber resin start from around £20 for a kilogram of frankincense, while larger high quality pieces of the green resin can cost up to £100 or more a kilogram. If you’re buying the best for Christmas then £10,000 would buy around 100 kilograms of Frankincense. You’d need a box the size of a shopping trolley, and maybe the trolley as well to move the 100kg around.

Myrrh: An Anointing Oil with Healing Properties

Myrrh, another resin derived from Commiphora trees, was renowned for its use in perfumes and medicines. Alongside its similarly religious ceremonial uses, myrrh is still used in skincare and cosmetics, aromatherapy, and also dental products. Some toothpaste and mouthwash products may include myrrh for its potential benefits in promoting gum health and preventing infections. As with Frankincense, myrrh prices depend on quality but on average 1 kilogram of myrrh costs around £40, so you could buy 250 kilograms of the fragrant resin for your Christmas king. That means a couple of extra trolley-sized boxes and the trolleys to transport them.

These gifts of yore hold special spiritual significance in the religious context, but they are also a demonstration of the lasting value of physical gold. The largest presents aren’t always the ones you want to open first.

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Considering more people are paying more tax because the income tax threshold was frozen last year, the bunting shouldn’t be hung too early. Meanwhile the outlook for the UK economy has also been downgraded and property prices are expected to slump almost 5% next year. So how do you invest in a sluggish economy? Investing in physical gold is one way to keep your powder dry, with the possibility of a rise in value during these uncertain times, easily liquidated when opportunities arise, and tax-free under certain circumstances.

Behind the headlines

A fall in the inflation rate or a tax cut both make for great headlines, but what do they actually feel like in the pockets of the people who are supposed to benefit? Despite inflation falling to ‘just’ 4.7% in October 2023, the fifth consecutive monthly decline, food prices were still around 30% higher in October 2023 than two years ago.

Similarly with energy prices. On the face of it October was a good month with gas prices down 31% compared to last year. But what that snapshot doesn’t show, is that the price of gas in October 2023 is more than double the price consumers paid two years ago, and they aren’t going to be returning to 2021 levels ever again.

Tax shouldn’t be taxing, but it is…

The main budget headline was a 2% cut in national insurance. The impact would be to put £450 back in the pocket of an employee earning £35,400 a year. But at the same time, more people are paying more tax because the income tax threshold was frozen last year and in the meantime inflation and wages have been rising, dragging more people into the income tax net.

Even with national insurance and other business tax cuts, the tax burden remains at post-war highs. Tax as a percentage of Gross Domestic Product (GDP) is one way to see how much money a government collects in taxes compared to the total money everyone in the country makes. It’s usually high in wartime to fund the war effort, but the tax burden has been rising steadily over the last 3-4 years. It is edging closer to the wartime record and may even surpass the levels seen during World War II in the next few years.

Slow growth projections

While the chancellor was dishing out tax cuts for national insurance and offering businesses permanent tax relief on investments, the Office for Budget Responsibility was taking this largesse and working it into their growth projections. While the economy has recovered faster than expected from the pandemic slump, the forecast for the next five years has been revised downwards. Inflation is expected to take longer to come down to 2%, which means interest rates are going to stay higher for longer than originally anticipated.

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What this means is that consumers will continue to struggle with the cost of goods and services, cutting back where they can, which will in turn affect business’s ability to grow. High interest rates, which have already had a major effect on borrowing and in particular mortgages, will continue to weigh on the property market. Housing transactions are expected to fall by almost 7% next year, and the OBR doesn’t think they will recover to pre-pandemic levels until 2027, while house prices are forecast to fall by 4.7% next year.

Investing in a muted economy

So, if the outlook for the economy is muted, how can you invest the recent ‘tax windfall’ to best protect it from the vagaries of stubborn inflation and sluggish growth? Diversification is a key tool in any investment arsenal, and physical gold offers a counterpoint to stocks that may be buffeted by economic and geopolitical uncertainties. US-dollar denominated gold has been on the rise for several months, buoyed by its safe-haven status amid the Hamas-Israel war as well as the anticipation that US interest rates have peaked.

Gold has a long history of protecting wealth during times of uncertainty. When wars break out that could impact global politics or economics, investors choose to invest in the precious metal to ride out the volatility. The Russia-Ukraine war, despite being confined to one region of the world has had an inordinate impact on global trade and economic stability, compounding rampant food and fuel inflation. Sterling-denominated gold has risen by over 15% in the nearly two years since the war began. The Hamas-Israel war also prompted a spike in gold prices.

Additionally, interest rates play a part in the expectations for the gold price. Because gold doesn’t pay a dividend, when interest rates are rising some investors choose to put their assets into investments that pay interest, rather than gold, that doesn’t. Known as ‘opportunity cost’, it refers to what you give up when you choose one thing (savings or bonds) over another (gold).

However, the expectation, especially in the US, is that interest rates have peaked, and may start to come down again in the near future, which lowers the opportunity cost of buying gold thereby attracting more investment. This means the outlook for some gold experts is positive even after gold hit new intraday highs above $2,100 in early December. Heng Koon How, head of markets strategy, global economics and markets research at UOB, told CNBC that gold prices could reach up to $2,200 an ounce by the end of 2024.

The drivers of gold demand are many and varied, and it is most often viewed as a long-term asset because it has a millennia-long history of maintaining value. With tax advantages depending on individual circumstances, high liquidity and its insulation from the banking system, physical gold is a prudent way to diversify your investment portfolio.

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“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

Three-quarters of Britons support a wealth tax but while the main parties keep ruling it out, it’s one of those thorny political issues that never really goes away. So, with labour in the ascendance,  how likely is it that a future UK government will implement a tax on the very wealthy? What exactly would they tax and how would they judge its price tag? Electronic assets and properties are easy to measure and value, but many other physical assets are more complex to tax. Meanwhile, where does physical gold come into all this?

What is a wealth tax?

A wealth tax is a tax on an individual’s net wealth, typically calculated by taking into account the value of their assets. It is distinct from taxes on how much they earn in income, or generate on the sale of assets, or receive via an inheritance. Proponents of a wealth tax argue that the most affluent in society are the most able to pay tax and should contribute more to the government coffers to promote a more equitable distribution of the tax burden. This is particularly pertinent in societies with wide income disparity.

Opponents argue that a wealth tax discourages the accumulation of wealth (or the removal of existing wealth to another country), and the actual process of administering a wealth tax is very difficult.

What gets taxed?

The composition of a wealth tax are different for every country or jurisdiction, but theoretically all assets owned could count towards the value of the wealth being taxed. This includes real estate (homes, commercial real estate, and other physical property), financial assets (like cash, stocks, bonds and other financial instruments of value), personal property (including vehicles, jewellery, art, antiques, collectibles and gold), retirement accounts, trusts and even the value of your life insurance policy.

How is it taxed?

There are various ways to implement a wealth tax, including a one-off payment or an annual tax on wealth. Spain has had a wealth tax on and off for decades and it is generally administered as an annual tax. Most wealth taxes, including the systems in Spain, Norway and Switzerland, are progressive, which means the higher the value of your wealth the higher the tax you pay on it. There are also sometimes allowable deductions, which refer to assets that don’t need to be counted. For example, some wealth taxes allow you to exclude the home you live in, or your pension, while most will deduct your debt, including the remaining value of your mortgage, from the wealth calculations.

Administrative difficulties

It’s actually very hard to implement a wealth tax. For income tax, countries already have clear and enforceable tax laws, efficient systems for filing and processing returns and robust enforcement mechanisms. But a wealth tax is fraught with difficulties, not least the process of valuing assets and the administrative costs necessary to be effective.

Determining the value of various assets owned by individuals can be complex. Different asset classes, such as real estate, privately held businesses, art, and collectibles, often require specialized valuation methods. But the process of valuation needs to be accurate if the tax is to be seen as fair and effective.

Implementation can also be expensive. Governments need to invest in systems for asset valuation, taxpayer reporting, and enforcement, and the cost of these must not outweigh the income generated by the tax itself.

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Then there is the concern about what lengths people will go to avoid paying the tax, including strategies to minimize the wealth they need to report or exploiting loopholes in the tax code. And, of course, there is the possibility that a wealth tax might impel some people to leave the country for one with a more benevolent tax system. Norway, which has had a wealth tax for many years, increased the percentage it siphoned from the wealthy in 2022 and 30 billionaires have reportedly left the country since then. Many have gone to Switzerland which still imposes wealth taxes by region, but these are lower (approximately 0.3%-0.5%) than the Norwegians (1%-1.1%).

How likely is a wealth tax in the UK?

As recently as August, the Labour shadow chancellor ruled out implementing a wealth tax if the Labour party win the next election. Does that mean it won’t happen? Not necessarily considering many a definitive pledge has been rescinded by future governments once in power. It’s also not a cinch that Labour will win next year. The fact is that there is societal support for a wealth tax. According a YouGov poll published at the start of this year, three-quarters of Britons support a wealth tax on millionaires.

The poll covered a range of scenarios and the two that gained the most support were a wealth tax of 1% on wealth above £10 million (78% support) or 2% tax on wealth above £5 million (73% support). There was less support for a tax on wealth above £500,000, which would affect around 8 million people. Meanwhile the TUC (Trades Union Congress) suggested in August that a wealth tax on just the richest 0.3% of the population could raise £10 billion for the government coffers.

If, as the polls suggest, Labour does wrest power from the Tories at the next election, their tax policies will be closely watched. Their stated preferred method of raising funds is to encourage growth, from businesses in particular. The shadow chancellor told the Sunday Telegraph in August that Labour would do “whatever it takes” to attract business investment into the UK, rather than put up income or capital gains tax.  

Some people would argue that capital gains tax and inheritance tax are in fact types of wealth tax. CGT is paid on the gains accrued on a particular asset when you come to sell it. It payable on personal possessions (except your car) over the value of £6,000, so jewellery, art antiques etc, as well as property that isn’t your main home and shares.

Whatever the tax regime, views on wealth taxes tend to ebb and flow with the fortunes of society. In the current inflationary environment where many middle and lower income households are still struggling with the rising cost of living and shrinking social services, a wealth tax that enables the government to provide much-needed support will be looked on favourably. In times of prosperity and growth, the calls for a wealth tax are far more muted.

Where does gold fit in the wealth tax debate?

If, or when, it comes time to develop a wealth tax, the easier assets to identify and value, like electronic assets or property, will be the most likely to come under scrutiny first. That’s not to say other assets won’t be included, but if you are worried about how easily governments can directly access digital assets to see what you’ve got – and potentially directly take what they want – then physical assets are the way to go.

But even with physical assets, it’s important to consider the tax implications, liquidity, security of storage, and of course the expected growth of the investment. Gold offers advantages in all these areas, with the option of tax-free gold depending on individual circumstances, excellent liquidity, secure storage options and a thousand-year history of maintaining value over the long term.

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HSBC this month launched a ‘tokenized’ form of gold bars, a digital twin of existing physical gold that is traded on a digital platform. While this is part of a wider trend towards trading digital assets, tokenizing physical gold can impact two important benefits of owning the physical asset – namely privacy and lower counterparty risk.

To maintain those key benefits investors should keep their physical gold in a safe, or if they need it stored then ensure it is allocated and segregated in a secure vault.

What is tokenization?

The HSBC product launched this month uses a process called tokenization. This is when an issuer (in this case HSBC) creates a digital representation of value for either digital or physical assets in the form of digital tokens.

The item of value could be physical (a painting, a building, a financial asset like stocks or bonds) or digital (a ‘non-fungible token’, or NFT, which represents ownership of digital art and collectables, or digital currencies). These tokens that represent the asset are recorded on a digital ledger or blockchain, which is the same technology that cryptocurrencies use to record transactions in Bitcoin or other digital currencies.

HSBC’s new product does this with gold held by its institutional investors. The idea is that HSBC creates a digital twin of its loco London gold, which is the gold held in its London vaults that underpins gold trading. Loco London gold comes in bars of 400 troy ounces or 12.4kg, each worth almost £700,000 (in November 2023).

Tokenizing this gold allows owners to trade it on HSBC’s digital platform, either as a whole bar or part of a bar. The tokens themselves are much smaller than the bar itself, representing only 0.001 troy ounces, so owners of the bars can sell it off fractionally, in smaller amounts than if they were looking to sell the whole physical asset.

How is tokenized gold different to other digital gold assets like exchange-traded funds?

Digital gold already exists, most commonly in the form of gold exchange-traded funds (ETFs).

The fund itself owns physical gold or derivatives tied to the gold price, so when you invest in a gold ETF, you’re buying shares in the fund. This gives you a proportionate ownership interest in the fund’s underlying assets. However, you don’t directly own the physical gold. ETFs are traded on traditional financial platforms like a stock exchange, so they’re highly liquid and can be bought or sold during market hours at market prices.

On the other hand, tokenization is the digitization of physical gold where each token typically represents ownership of a specific quantity of gold. The physical gold is often stored in a secure vault, and the tokens are issued on a blockchain. Token holders have a direct claim to the underlying physical gold. Trading typically occurs on blockchain-based platforms (in HSBC’s case on its digital platform), and liquidity depends on the level of adoption of the token and the platform it’s traded on.

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So, while both tokenized gold and ETFs are forms of digital gold, in the former you own the asset and trade it digitally via a blockchain platform, and in the latter you own a share of a fund that owns gold, not the gold itself.

How does tokenization affect the benefits of physical gold?

When physical gold ownership is recorded or traded on an immutable ledger or blockchain, the privacy of the asset may be compromised. In addition, tokenization increases counterparty risk.

Physical gold has the enviable characteristic of anonymity. If you take physical ownership of your gold, store it yourself and perhaps pass it on to your family members, it is a private asset. Even if you choose to have it stored in a vault, if it is segregated and allocated, the gold physically belongs to you, and you can take delivery of it whenever you like.

Tokenization takes a physical or digital item and creates a secure record of it so it can be traded or tracked easily. Tokenized gold is recorded on a digital ledger, which, while not necessarily part of a public database, still reduces the privacy benefits of owning the physical gold without tokenizing it.

In addition, counterparty risk (the risk that one party in a transaction will default on its obligations) increases with the tokenization of physical gold.

Owning physical gold is largely counterparty risk-free. There is a direct exchange of goods, and the item is yours. This low counterparty risk is a key benefit of investing in physical gold especially for those worried about bank collapses or other failures in the financial system. However, the process of tokenization requires a financial or other institution to facilitate the making of a digital token, provide the platform for trading, and ensure the process of trading is secure. Each of these stages introduces another layer of risk that was not there before.

Will tokenization affect your physical gold holdings?

Tokenization makes sense for institutional investors with large gold holdings who want the benefits of physical gold (a safe-haven asset that is often used as a hedge against market volatility) while also enjoying the benefits of easy tradability. It also works for HSBC because it already uses its digital platform to facilitate the trading of assets, and gold is just one more asset in this portfolio.

The product is not available to retail investors at this stage anyway, so even interested gold buyers wouldn’t be in a position to trade tokenized gold. But the winds of change are blowing in that direction, and as tokenization becomes more commonplace it is likely fractional ownership of physical gold could become an alternative option for all investors.

For some, the aim of tokenization is to provide the benefits of gold ownership without the complexity and limitations of buying the physical asset, such as storage and transaction costs. But for others, the process of tokenization limits the benefits of privacy and lower counterparty risk. If that is the case, then buying physical gold ‘the old fashioned way’, ie.  taking a delivery or opting for segregated and allocated storage, is the best option.

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Equities

The uncertainty of war always has an impact on stock markets, although the severity depends on the perception of the risk. The invasion of Kuwait by Iraq in 1990 sent the S&P 500 stock index down 18% and oil prices doubled, although markets calmed somewhat when US forces began to amass on the border ahead of Operation Desert Storm. The state of the market before a war will also impact on how dramatically it moves, for example the dot com bubble had already depressed stocks before the US invaded Iraq in 2003.

More recently, London stocks plunged 6.7% in just one week after the start of the Russian invasion of Ukraine in 2022. While most markets recovered relatively quickly, the long-term effects of the subsequent inflationary pressure and cost-of-living crisis has dampened economic growth in many countries.

In the current situation, global market reaction has been very modest. While Tel Aviv stocks and foreign-listed Israeli companies with exposure to the economy there have suffered declines, overall, markets around the world have been influenced more by internal economic factors and have largely shrugged off the distant war.

What has been affected more noticeably is the price of oil which rose around 7% shortly after the war began, although it has retreated since then. Middle East conflict will always impact energy prices because almost half of proven global oil reserves are there, and any conflict risks interruption of the flow of oil around the world.

Higher oil prices have an impact across the world, most notably on inflation which has only just started to ease after rampant rises around the world throughout 2022 and early 2023. If the conflict in Israel and Gaza spreads beyond its current borders, the impact on energy supply and prices could herald another period of rising costs, hitting global businesses and adding recessionary pressure to already fragile growth.

The spectre of a more global war is still hypothetical, and most stock markets are not responding recklessly, but the risks grow as long as the conflict continues. Most people have at least some, possibly a lot of their assets in the market and volatility can be value destructive, especially if they need to realise their assets now, for example if they reach pension age.

The effect of war on business

War can have a positive effect on businesses if they are in the market for conflict paraphernalia like guns and tanks, but often the fallout for the wider business world reflects the economic strain that even distant wars create. Under pressure from increased supply chain costs, inflationary pressure from the rising price of fuel and other goods may stifle corporate growth, and could also lower their risk appetite and decrease M&A activity. The effect of the Russia/Ukraine war on food producers hit by the already soaring fertilizer prices, a large proportion of which is manufactured in Russia, has been a key reason for food inflation over the last year.

The oil price also rose then, as it is rising now, and the combined effect of two conflicts putting pressure on global energy prices means businesses and consumers can expect to feel the pinch longer and deeper.

Where the pressures overwhelm businesses, failures or curtailments have an impact on pension fund investments, stock markets and the health of the wider economy, affecting investments in many sectors.

Property

War’s impact on property is not a direct one. While the war itself won’t reduce or raise the price of houses in countries outside of the war zone, the pernicious effect of inflation and interest rates can have a substantial impact on property prices.

The UK government, and central banks around the world, have been forced to raise interest rates emphatically over the last two years in an effort to curb high inflation. While the Russia/Ukraine war wasn’t the only cause of that inflation, the effect of the war on energy and food prices is indisputable. Rising rates during a cost-of-living crisis has had a real impact on the property market in the UK where year-on-year house prices have been falling for the past eight months according to mortgage lender Nationwide.

The outlook, even before the current conflict in the Middle East, was for this decline to continue, whether precipitously or gradually. A return of extreme inflationary pressure if oil prices continue to rise and the conflict escalates can only be bad news for home-buyers hoping the Bank of England might lower rates following its 14 consecutive rate rises between 2021 and 2023.

Inflation

The inflation rate in the UK has remained stubbornly high. Not as high as the October 2022 peak in the Consumer Price Index of 11.1%, but stubborn nonetheless at 6.7% in September, the most recent data available. It is also the highest inflation rate among developed countries. Inflation erodes the value of cash, so unless bank interest rates are paying more than the inflation rate (they’re not), then holding cash under your mattress or in the bank is a good way to lose spending power.

Gold has historically been a reasonable hedge against inflation over the long term, rising as the cost of goods rise and maintaining purchasing power where currency is being eroded by the increasing price of goods.

That said, over the shorter term the gold price fluctuates in response to many economic and political stimuli, including inflation, and the correlation is not perfect. Still, maintaining gold in a portfolio of strategic inflation hedges is a prudent move, allowing diversification and safe-haven advantages.

Gold

Gold has a long and venerable history of retaining or increasing its value during times of instability or uncertainty. It is called a safe-haven asset for good reason, and it is recommended as part of an investment portfolio because it often rises when other assets like stock are falling. The war in Ukraine and the outbreak of hostilities in late February 2022 sparked a flight to safe-haven assets, pushing the gold price up 18% from the beginning of February to early March of that year. Silver rose over 20% in the similar period.

Now, gold has once again proved to be the safe-haven asset many investors are turning to amid the Israel/Gaza conflict. The gold price has risen over 7% in sterling terms since the outbreak of hostilities. It’s clear that while stocks are holding on, investors fear the risks of contagion and are looking to hedge against uncertainty with an asset that tends to rise when other assets fall. 

Physical gold assets sit outside the banking system, reducing counterparty risk, and under certain circumstances there may be tax advantages to owning the precious metal. Certain forms of gold are capital gains tax-free (coins minted by the Royal Mint) and investment-grade gold is also VAT free.

The impact of the Ukraine war was both immediate and long-term. The impact of the Israel/Gaza conflict can only add further inflationary pressure just as it was beginning to alleviate. And if the conflict spreads further, stock markets will have to react more forcefully. Against this backdrop it would be prudent to hold gold within a balanced portfolio and let it’s safe-haven properties shine. 

Could gold work for you?

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The war in the Middle East has investors rushing for safe haven assets, pushing up the gold price and spurring demand for the physical metal at The Pure Gold Company.

In the first week following the Hamas invasion enquiries surged by 400% as customers sought to protect their assets from the potential wider fallout in the region. CEO Josh Saul said: “Historically, gold has been the go-to safety net in tumultuous times. In the weeks just before and after the Russian invasion of Ukraine in February 2022, the gold price spiked by around 17%.

As the conflict has deepened, demand continues to grow. Two weeks in, the gold price had gained almost 9%, and demand for gold coins and bars at The Pure Gold Company had increased 260%, compared to the average weekly demand in 2023. Now, almost a month later, the gold price is still near all-time highs.

“The risk of contagion grows the longer the conflict continues, and if it spreads beyond Israel’s borders the geopolitical ramifications could be very severe. The oil price is already up in response to the conflict, and if its keeps rising, inflation could start to increase again. We were only just starting to recover from an inflation-induced recessionary environment, and this could seriously impact market volatility. 

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“Our customers are buying gold to protect their assets and act as a safety net because the safe-haven properties of gold come into their own during times of volatility. Markets were subdued for the first week, but as the invasion has escalated into war, the perceived risks have increased, and stock markets have started to lose ground. Rate rises have already dampened the property market, and further uncertainty can only add more pressure there. Gold has a long history of maintaining its value when other assets are falling.

“Some of our customers are specifically looking to remove their wealth from the banking system, because for them the global financial system becomes uncertain in times of war or terror. The added benefit of tax-free gold, depending on individual circumstances, creates a compelling case for buying physical gold. 

Up to date sales and enquiry figures, case studies and commentary are available from Josh Saul.  

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As part of ITV’s £1 million Giveaway, Josh explained that gold is seen as a safe-haven investment with a long history of protecting against inflationary pressure and volatile markets.

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The history of currency

Before money, people bartered for goods. A bushel of apples would buy a chicken, and a chicken could buy ten loaves of bread. But your barter partner had to want the bushel of apples and have a chicken to sell, or they would end up with ten loaves of bread instead. To smooth out these inherent imbalances, commodities became a form of currency. Easily tradable items like animal skins, salt and cowrie shells evolved to become the medium of exchange, which smoothed the wheels of trade and speeded up transactions.

Bronze coins were first used as currency almost 3000 years ago in China, but the first true gold coin is attributed to Croesus of Lydia in what is modern-day western Turkey in around 560 BC. These coins were of a standardised purity, stamped with an image and the weight of the coin, which contributed to the veracity of the currency. This form of gold coin proliferated around the world, with different countries minting their own coins through the millennia, like the Roman Aureus and the Spanish Doubloon, often depicting the leader of the time.

While the fortunes of gold coins waxed and waned in different parts of the world for many centuries, the Middle Ages saw a resurgence in their popularity and the Renaissance ushered in an era of intricate coin design. In the UK, the one pound sovereign (gold), guinea (gold), shilling (silver), and penny (silver, copper or bronze depending on date) was the standard currency for several hundred years until the first world war when the gold pound coin was replaced by a one pound banknote.

The gold standard

While gold coins and bars have been used for trade around the world for centuries, the gold standard was informally adopted in England in 1717, formalised in 1821, and became the international standard in 1871. The gold standard is a monetary system where the paper currency used by a country has a gold value. It was possible during the gold standard to convert your pound note or Federal Reserve dollar for its equivalent in physical gold. It also meant countries would need to hold enough gold to cover their entire issued currency.

A country that uses the gold standard will set a fixed price of gold and use the price of gold to determine the value of their currency. So, if the US price of gold is fixed at $20 and the UK price of gold is fixed at £4, then £1 would buy you $5. The international gold standard that governed monetary policy around the world between 1871 and 1914 worked effectively to keep inflation down. It did this by limiting the amount of currency that could be printed to the amount of gold held by the government. In times of peace, tying the global trade system to gold worked very well, but the start of World War I amplified the limitations of the system.

Adhering to the gold standard meant countries couldn’t print money to devalue their currency in order to make their economy more competitive internationally, or pay off debts. It was also impossible for countries to respond to crises like the war, which they needed money to fund, so they left the gold standard to be able to print more currency.  After the war, a new gold standard, the Gold Exchange Standard, emerged, but it was a less rigid system that allowed for greater flexibility in the use of other currencies alongside gold.

Ultimately the gold standard was abandoned after the great depression and any remnants of the post war system dismantled by the 1970s. Even so, countries like the USA, Germany, Italy and France still hold substantial gold reserves (the UK sold over half its gold reserves between 1999 and 2002 when prices were at their lowest for 20 years; probably not one of Gordon Brown’s better decisions). These days countries work on a system of “fiat” currency (derived from the Latin word fiat, meaning a determination by authority) The government-issued currency (usually paper money) is imbued with value merely because the government says so.

Free floating gold

The US finally left the gold standard in 1971 after maintaining a gold price of $35 an ounce for 27 years. Without the constraints of a fixed gold price, gold has been allowed to fluctuate on the whim of market supply and demand. Gold’s trajectory has its fair share of peaks and troughs, but the long-term direction of travel remains up. By 1974 gold had surged fivefold to $180 an ounce, and hit around $680 in 1980 before falling back for most of the 80s and 90s and then finding a resurgence at the turn of the century. The value of gold since 200 has risen by over 550%, peaking at $2074.88 in August 2020.

What is gold to us now?

Buying investment-grade physical gold in the UK means buying coins or bars, and some of those coins are the same sovereigns used more than a century ago (albeit newly minted with the King’s head today). They are still recognised as legal tender in the UK so do not attract capital gains tax when sold (depending on individual circumstances), but trying to spend them in the local store would be unwise. Their face value continues to be just a single pound, whereas their weight in gold is worth far more than that (£1,560 in mid-October 2023).

So, while gold continues to be recognised as a form of currency in the UK, its value lies in market demand and the fluctuating gold price. Many people choose to invest in physical gold because it is recognised around the world (it retains its currency status despite the proliferation of fiat currency). Additionally, they may not trust the government issued fiat currency to maintain its value as well as gold. The rampant inflation sweeping the world for the last two years is a case in point. The aftermath of the Global Financial Crisis and the global pandemic meant central banks printed vast sums of money to stimulate sluggish economies, and the fallout has included a rapid increase in the cost of goods. Gold is a commodity so tends to increase in value as the price of goods rises. And while the relationship between gold and inflation is not perfect, gold does have a strong history of maintaining value in inflationary times.

Storing your wealth in physical gold can be an easy alternative to fiat currency because popular gold coins can be easily converted into cash (TPGC offers a buy back guarantee usually with a turnaround of 1-2 days). Even as paper money begins to disappear into the plastic credit cards and electronic wallets of the technology revolution, gold continues to be valued as a tangible currency with a long history of long-term growth.

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Gold & silver similarities and differences   

It’s hard not to compare gold and silver instead of just looking at silver on its own merits. The two metals are inextricably linked by their venerable history as revered precious metals, have been used as currency for centuries and hold their value over the long term. Both silver and gold are ways to diversify your investment portfolio, offsetting the risks posed by stock market upheaval.

But if they share so many traits, why is gold trading at almost £1600 an ounce and silver at a fraction of that (£19 an ounce)? The key reason gold has always traded at a higher price than silver is it rarity. According to the US geological survey 1.74 million tonnes of silver has been discovered to date, compared with 244,000 metric tons of gold. While gold mining is its own end, silver is often produced as a by-product of mining for other minerals like copper, lead and zinc.

The gold/silver ratio

While gold has always been more valuable than silver, the difference in their relative prices remained fairly stable for hundreds of years. The so-called gold/silver ratio describes the number of ounces of silver required to equal the value of an ounce of gold. For several hundred years it stayed within a tight range of between 9 and 14 before the ratio widened substantially in the 20^th century. In the last 20 years, the ratio has been as low as 31:1 in 2011 and as high as 115:1 in 2020.

Why does it matter? Many silver investors believe the gold/silver ratio gives an indication of how over or undervalued silver is. Having spent hundreds of years in the low double digits, some investors think the more recent spikes are an anomaly and the silver price will rise to reflect its truer value. At the end of September 2023, the ratio stood at 81:1, well above the centuries-long average but some way below its recent high.

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What affects the silver price?

Whether or not the gold/silver ratio is your preferred reference point for silver investment, it’s still essential to understand what affects the supply and demand for silver.

The bulk of the gold produced annually goes into investment and jewellery, and while silver also derives demand from these areas, industry accounts for over half of silver demand. It is a highly conductive metal and is used in a very wide variety of industrial applications including in electrical and electronic devices, plasma TVs, LED lights, medical equipment, batteries, solar panels and many more products.

The preponderance of industrial demand means silver’s fortunes are influenced by the cycles of the global economy. When there is a slowdown in growth, industrial demand falls and that can impact the value of silver. But this simple view doesn’t take into account the strength of investment demand or the fashion for silver jewellery which can equally wax and wane on a whim.

Market Volatility

The multitude of demand levers is one reason silver is usually more volatile than gold. Changes in industrial demand can have a big impact on the silver price, as can demand for investment. Despite industry accounting for more than half of silver demand, silver remains a commodity and is also impacted by changes in market sentiment, inflation, interest rates and currency.

Silver also operates in a smaller and less liquid market, with lower trading volumes and fewer buyers and sellers. This illiquidity exacerbates volatility, as any changes in demand and supply have a disproportionately large impact on value.

The smaller market makes it easier for speculators to manipulate the price, as was evident in 2021 when small-time traders, responding to a call to action on social media, began to buy up silver in a bid to challenge what they saw as prices kept artificially low by hedge funds. The surge was brief but did serve to demonstrate the volatility of the precious metal. It is unlikely a concerted effort on behalf of social media pundits would move the dial on gold in such a headline-grabbing way.

Some investors appreciate the volatility of silver and use it to their advantage. But this short-term strategy is very risky and is really only suitable for very experienced investors with a high-risk appetite.

Is now the right time to buy silver?

For investors looking to use silver in the same vein as gold – as a long-term store of wealth, providing diversity in a portfolio – while also appreciating that silver offers a lower entry price point than gold, then silver is a perennial investment option.

The Silver Institute expects silver demand to remain strong in 2023, with industrial demand potentially reaching all-time highs, following on from strong growth in 2022.  With demand underpinned by industry, silver is likely to retain its safe-haven precious metal status, rising and falling on short-term volatility but growing over the longer term.

Actual forecasts vary widely, with some banks bullish and others more cautious about what the silver price will do. Citigroup said in May the silver price could reach $30 an ounce over the forthcoming six to 12 months. Meanwhile, JP Morgan said in July that silver prices are expected to hover around $26 an ounce for the remainder of 2023.

The question is not when will silver outshine its more popular gold cousin, but rather how can investors use both commodities to diversify their portfolio and enjoy the lustre of long-term precious metal investments.

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