Gold Part 1: Physical Gold
It is the ultimate insurance against anything that can go wrong in the financial system. Gold protects against currency devaluation including hyperinflation, bank crashes,, currency defaults, but also against severe bear markets. So it is really very different from any other financial instrument. It does not have a return on its value, no dividends or interests (unless you invest in gold mines). It just serves a different purpose.
Compare it to a fire insurance on your home. That is basically a cost. Year after year you just spend the money and you get nothing in return, except the insurance that in case of fire, you get your home reimbursed. But even that comparison has its limits because gold can rise in price and on the very long term has a price increase higher than inflation.
Current price level and potential for gains?
My expertise is very limited here. To answer this correctly, you would need to understand the big lines of supply and demand, for the last decade or so, preferably coupled with an understanding of the same supply and demand during the 50 years before that. A good starting point is here.
What I do know is that
- if you draw an exponential line (representing the average price increasse during the last 50 years), the current price level is close to the average. Not expensive, not cheap. Link
- apparently, major central banks are accumulating gold since a number of recent years (link). So there is a healthy demand. And the banks keep doing this, so there seems to be more demand pressure than supply pressure for the coming years. Link here and here
- Gold is inversely related to interest rates (if money / bonds deliver a high return, money flows into that and away from gold); related to inflation (which is normal – when financial assets deteriorate quickly, people trust gold to keep its value). Considering that interest rates are low today and likely will rise rather than drop in the far future, this gives more probability for gold prices to rise than to drop.
- movements in gold prices are like movements in stocks: on the short term the market is a weighting machine, in the long term it is a value machine. So these drivers of ‘interest rates’ and ‘central bank purchasing’ won’t necessarily impact gold prices next week or month, but if you wait until the next recession hits (couple of quarters from today), gold prices can have gone up considerably.
To summarize: gold is in the first place an insurance against calamities in the financial world, but can additionally provide some profits. You probably shouldn’t put 100% of your savings in an insurance, but adding a smaller part of your savings in gold could be a wise thing.
How to invest in gold?
Which is a valid question, since gold is not a security like other securities (stocks, bonds, savings account, ..)
Main possibilities to carry gold are:
- physical, such as coins and (staven) bullion
- gold stocks / ETF’s
- Gold mines
and besides that, you could also invest in alternative precious metals, such as silver or palladium, in the same manner as gold.
Is the ultimate protection. Gold ‘on paper’ still carries risk, if the paper appears to be paper of an institution which ceased to exist, or governments have put their hand on it.
‘Physical’ means you purchase or order gold somewhere, then receive the coins / bullions, then keep it yourself (safe or at home or whatever). The two most ‘liquid’ or common physical forms are gold bullion and gold coins.
Bullion has the disadvantage of being a larger amount (36200 € for 1 kg today, feb 2019); at the time of selling, you only have the choice to sell the entire piece at once or not selling. Coins are handy smaller amounts but have the disadvantage of having a higher commission to purchase and sell (easily 1,5 – 2 %). But you can purchase and sell in a small quantity of one coin a time.
There are no taxes / no VAT (BTW) on the purchase (except if it is jewelry) nor on the selling of gold (in Belgium). There is no capital gains tax. Basically, nobody knows you have gold, so how could it be taxed? For that matter, it is sometimes used to pass an inheritance, without having to pay taxes. At the purchase, your identity is checked (at least for quantites > 10000 €) , and you should receive a receipt which is proof of your purchase. You should also have a certificate. This certificaate is anonymous and guarantees the gold bullion (XXX gr with N° 0123456 has been produced by Umicore and contains 99,99 % gold)
There is a limit of 3000 € cash which you can spend on gold. Above that, it should be purchased by wire transfer (over schrijving).
You should only buy the most common editions of coins: Maple Leaf, Krugerrand, … and not the special editions often made for special occasions / rememberances / happenings. The reason is simple: the world standards are worldwide well-known coins, so when the time comes to sell, you will not have any problem to sell withour any discussion on their value. Lesser known editions will have to be weight / checked before you can sell.
Gold with the “Good Delivery” label is even more trustable. It is kind of a quality label which guarantees things like correct fineness, weight, dimensions, appearance, marks, and production weight, composition and quality in general.
Where to buy? How?
Plenty of places, a few of the most common are (BE and NL):
- Your local bank. Easy but probably not the cheapest solution. they easily charge 0.5 % more commission compared to others
- thesilvermountain.nl: you pay (wire), they are delivered within a week. You can choose for insured transport. Good reputation, reliable.
- Eurogold (Bxl)
- Numagold (Bxl) (you need an account at Numagold!!)
- Gold4ex (Bxl)
- The House (Bxl)
The next post will continue with Gold ETF’s. See here.