You may like to read our updated version of this article, Why buy gold in 2024?
The start of a new decade, like any new year, is always a prime time to evaluate life choices. Diets, gym membership, job searches, divorce, they all peak in early January. The desire to make sure the forthcoming year is better than the last is also a good motivator to consider how you look after your hard-earned assets. While you can control your gym visits or your new job applications, you can’t control the decisions by international leaders that could mean a market slump or the collapse of a financial institution.
Some of the reasons for gold investment in 2020 still hold true year after year, but some make it more important than ever to consider investing in the precious metal to protect your assets from other people’s decisions.
Long term Gold investment
Buying physical gold shouldn’t be a short-term purchase. The cost difference between buying and selling (spread) makes turning a quick buck very difficult, and the nature of the gold price means it appreciates over the long-term. Since the turn of the century, the gold price has increased over 400% in dollar terms and almost 600% in sterling terms.
Despite a strong year in 2019, gold is still some way from its peak price in 2011. There are plenty of external influences that could push the price up over the course of the next year. Many of the factors that led to the 18.6% rise in 2019 remain. Brexit is still not resolved, and there will be years of upheaval during the process of transition.
Is Gold a Good Investment in 2020?
The US political situation remains uncertain, with foreign and economic policy decisions that have a major impact around the world. With the added uncertainty of a US election in 2020, events on the international political stage could take a number of interesting turns. This all adds to the overall uncertainty and caution in global markets.
There are many analysts, investment banks and market commentators who expect the precious metal to rise further over the next year. Goldman Sachs expects gold to grow beyond $1600 this year, while UBS has a similar outlook. These are actually fairly modest expectations. One bullish asset manager believes gold could head past $7000 this decade. Even the modest growth would be better than next to no interest growth on savings, so getting in now for the long term looks to be a prudent move.
Investment Market uncertainty
The FTSE 100 ended 2019 up 12% while the S&P 500 closed the year 29% higher than it started. But many market experts don’t expect this level of growth to continue indefinitely. There are still concerns about a substantial market correction because there are still enough potential catalysts to deflate the decade-long bull run.
The US/China trade war could just as easily be resolved as it could worsen, and European discussions on Brexit are as likely to lead to a deal as to end in a no-deal exit. There is no certainty for any of the international political or economic drivers. While there are no specific shocks, the stock market has been rising, but this can’t continue indefinitely.
In the UK, the resolution of the recent election has meant at least that the ruling Conservative party can move ahead with their Brexit plans unhindered. But prime minister Boris Johnson is not shy to take the country out of the EU without a deal, and the economic ramifications would be damaging to markets, whether temporary or long-term. UK residents have another year of uncertainty to contend with, which will impact on the market, sterling and the wider economic climate.
Meanwhile, the property market is tempering. After several hiatuses during the key Brexit elections, parliamentary votes and looming leaving dates, the most recent election has given some lift to the stagnation in the market. However the spectre of a no-deal Brexit could have an impact on the market, and the fact remains that people are wary, of selling and of buying, while the future remains uncertain.
Global politics on a hair-trigger
While the markets may have enjoyed a strong year in 2019, the sentiment is now more cautious and alert to negative triggers. The heightened political uncertainty emanating from both Europe and the US, along with global interdependence, means shocks in one part of the international system can spread quickly. Market reaction to the twists and turns of the trade war between the US and China is a case in point, and Donald Trump’s unpredictable policies mean uncertainty is the norm.
The recent escalation of middle east tensions following the killing of an Iranian General by US hands sent the gold price to a four-month high, and highlights the uncertainty of global politics.
Tax savings and pensions
We all have to pay income tax, 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 coins, you avoid paying tax on your gains during that tax year. 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.
In addition, in 2006 the UK government allowed physical gold to be held in Self Invested Personal Pensions. When you buy gold for a SIPP it must be in the form of bars and a minimum purity of 995 out of 1000 (99.5% pure).
The tax advantage of holding gold in your SIPP is that the government will provide tax relief between 20% and 45% depending on your tax rate. This might significantly boost your available pension pot at retirement. The increase in the value of your gold over time is also free of capital gains tax, which is normally paid at 28%. Be aware that when paying into your pension, not all SIPPs are enabled to hold gold so it’s worth checking which SIPP pension schemes allows this type of pension contribution.
Safe-haven assets gold investments
Interest rates are at long-term lows which means any cash placed in savings accounts would erode in value as inflation ate away at the buying power of the cash. Savings are also subject to counter-party risk. In an actual financial crisis, bank deposits are only protected up to £85,000 in the UK, and a sudden market crash or major banking crisis could cause overstretched institutions to fail.
Stock market investments are an important part of an asset portfolio, but investing in physical gold is a hedge against a decline in these assets if the markets do fall suddenly.
Investing in physical gold has been a safe-haven choice for hundreds of years, and it has proven itself through many of the slumps and recessions over the last century. If ever there was a time to protect your assets, it’s now.
