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 Arabian Pure Gold 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

The post 5 Reasons to invest in gold in 2024 appeared first on Arabian Pure Gold.

Our offices are closed from Dec 23rd to Jan 1st

We open again at 9am on Jan 2nd

Gold and silver deliveries will be suspended between Dec 15th and Jan 8th to ensure the safety and security of your precious metal purchases (this is the busiest time of the year for couriers).

We wish you a joyful holiday season and look forward to speaking to you in the New Year!

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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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Public trust in the UK government is at a seven-year low, according to the annual Edelman Trust Barometer, mostly provoked by economic pessimism. This growing scepticism is a key reason Ian Peacock upped his gold holdings from 10% to 50% of his investment portfolio. He’s not taking any chances.

Wakeup call

Ian started buying gold in 2020.

“I woke up!” he says. It started with questions and uncertainties about whether the UK government was telling the truth about the Covid-19 pandemic. “Once I saw the money being wasted by the government under false pretences, on things like the Covid App, PPE, PPE Contracts etc, I started to wonder whether the financial system was equally as murky, and maybe we weren’t being told the truth here either.”

“Once I started to research and understand the system, I realised that we are in a bubble that has to burst. The governments are broke and inflation was going to get very bad. I invested in gold as it is a hedge to inflation, I don’t expect to make a profit on it, but it will protect my wealth against inflation which is currently stealing a lot of my money.”

Consultative approach

The initial impetus for buying gold was how the government handled the Covid pandemic. Ian chose Arabian Pure Gold because of its consultative approach which gave him the information he needed to make an informed decision about his gold investments. More recently Ian has continued to add to his gold portfolio because he has concerns about the billions of pounds being sent to Ukraine. He believes government spending is out of control.

“Either way it is a lose lose situation. We are in a bubble that has to burst or be continually propped up by the government. If the bubble bursts you lose your money. But if the government keeps propping up the markets by printing money, then inflation will make sure you lose your money as well.”

Josh Saul, CEO of Arabian Pure Gold said: “There are an increasing number of clients who want to protect themselves from a financial system that they see as flawed. As the economic situation worsens, the sense of dissatisfaction with the government grows and they turn to physical gold to shield themselves from both the inflationary environment and the financial institutions that they no longer trust.”

Ian, an engineer in his 40s from Cambridgeshire, still owns some stocks and shares from before the pandemic but hasn’t bought any more since then. He keeps up with current events, monitoring prices and financial news every week. He is using his savings to make regular gold purchases.

“The world we live in now is only going to get worse in the short to medium term.  Fiat currency in all countries is getting less and less in terms of what it can buy you and conversely the value of gold will continue to rise.”

Today Ian’s gold holdings have grown to 50% of his portfolio, and he has sold some stocks from his SIPP (Self Invested Personal Pension) to invest in physical gold in the same vehicle. He’s making sure he has a safe haven when the bubble bursts.

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Stalled growth, stubborn inflation, high interest rates, failing banks, ratings downgrades, the red flags are flying and experienced investors are getting worried. Especially investors like Natalie Riesenberg who has seen, first hand, the fallout of a major economic crisis.

On Friday 12 September 2008, Lehman Brothers trader Natalie Riesenberg and her colleagues were placing bets on which bank would own them by the end of the weekend. No-one bet it would be a bankruptcy filing. What followed was a month of playing management-sanctioned video games while they waited to know their fate.

Today, Riesenberg is 15 years older and better prepared. She’s watching as banks falter or fail and she’s making sure she isn’t blindsided by another economic downturn. 

“I have rectified my mistakes and am investing in gold for long term security.”

In the front row of the Global Financial Crisis

“On the morning of 15 September 2008, I arrived at the office and was handed a piece of paper. It said: ‘Do not to speak to clients, do not to switch on your computer and do not to trade’.

Each department was to be sold off and it was clear that without its people, the departments were nothing, so we stayed there for over a month waiting to be bought. Eventually, after several days we were allowed to switch on our computers in order to play games – Tetris, Angry Birds and a selection of other ‘high-brow’ games.”

“I remember a Managing Director approaching my desk in excitement at a new game they hadn’t seen before. I forwarded it to them and soon after, you could see multi coloured balls bouncing across the multiple screens on their desk as they tried to explode colourful balloons. It was a very surreal sight, walking the trading floor every morning to see millions of bouncing balls on hundreds of screens played by dozens of educated, intelligent men and women waiting to find out their fate.”

Natalie had been at Lehman Brothers for a year before the crash, working as a sales trader for the Emerging Markets Credit Derivatives team.

“2008 really did feel like the end of the world. A more experienced trader who saw the crash of 1991 would perhaps have felt less concerned perhaps about the crash of 2008 or at least have been better prepared for it.” she says.

Back then, Natalie saw the value in investing in gold, but she was dipping in an out rather more quickly than the average long-term investor. She regrets not buying and holding gold back then.

“I often told my parents during that time that they should be investing in gold. It was one of the easier assets for a lay person to understand.” But she didn’t take her own advice until much later.

While gold as an asset class is simpler than many financial investments, it can still be daunting for the lay person to know when and what to buy. A consultative firm like Arabian Pure Gold talks directly to its clients to ensure they understand their options and can make an informed choice. Natalie also turned to Arabian Pure Gold when she decided to buy gold. For an experienced investor, Natalie wanted to be able to take advantage of trading opportunities when they came up, and their Buy Back Guarantee gave her this option.

A new perspective

So, what has changed? For Natalie a lot of it has to do with perspective. She has a family now. “I have my children’s financial security to think about and this gives me a new and different perspective to that of 2008 when I was carefree. As a sales trader there will always be a part of me that enjoys risk and playing the market, but I would always want to hedge myself with something more secure and for me, that is gold.”

“In this market and the looming years of economic downturn, to solely invest in risky assets would be foolish, especially if you have a family to think about. The global economic downturn is clearly a concern, which makes me even more inclined to either invest solely in less risky assets such as gold or bonds or at least heavily hedge myself with them.”

The sense of déjà vu is increasing. After three major bank failures in the earlier this year, the US banking sector came under further pressure in August following a downgrade by ratings agency Fitch. The June downgrade leaves the entire sector just one rating away from widespread negative actions, which could hit large and small banks around the country. Meanwhile in the UK, Metro bank is floundering, and next year the Bank of England said it will “take stock and update” its stress tests, looking at whether more banks should be added.

Echoing customer concerns

Josh Saul, CEO of Arabian Pure Gold says: “Natalie’s concerns about the future of the economy are particularly worrying because she has experienced a major global market crash first hand. We focus on ensuring our clients make informed choices about buying gold, and have the opportunity to sell quickly when they find new opportunities.”  

Today, Natalie’s portfolio includes gold. She uses it to protect her wealth from market volatility and counterparty risk – the risk that the other party to your transaction or investment (banks, companies, governments) might fail. Physical gold reduces counterparty risk, which has become much more acute as the number of bank collapses has risen during 2023. It is a tangible asset that, well-stored in a segregated, allocated vault, provides a safe-haven from an uncertain future.

The post Natalie Riesenberg has good reason to fear another downturn appeared first on Arabian Pure Gold.

“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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Most investments are subject to some form of taxation, but physical gold can be totally free of VAT and capital gains tax.

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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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Most investments are subject to some form of taxation, but physical gold can be totally free of VAT and capital gains tax.

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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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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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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. 

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