As a precious metal, gold has no substitute in the world. Its ability to lock in value and provide stability and liquidity within a diversified portfolio is unmatched. Although investors have shown interest in other precious metals like silver, gold is still the preferred option for building wealth. It is considered to be a safe haven for investors during times of trouble. Yet, several investors from the beginner to intermediate levels are confused about key aspects of the gold buying process. So, in this article, we will explore all that buyers need to know about buying gold.
Setting gold buying objectives
The decision to add gold to your portfolio needs to be a planned and calculated process. The first thing that investors need to do is to decide their personal objectives that drive them to acquire gold. Mostly, these fall within two categories - collect ability and wealth building.
Some investors are really numismatists, interested in collecting gold coins as a hobby due to their rarity value. However, the focus has shifted in recent years to build a collection that also generates profits. Investors focused on building wealth would buy coins and bars with lower premiums and hold them over a longer timeframe to generate healthy returns.
coins are both VAT and CGT free in the UK
Deciding to buy gold coins
Within the gold coins segment, there are three distinct categories.
1) New releases are bought by collectors every year and they follow the issues of these coins from mints around the world.
2) Collectable coins enjoy great demand from numismatists. These are rare and limited editions and usually, carry a hefty premium. They differ from new releases since the former category has lower premiums when released.
3) Bullion coins also present a lucrative investment option and can be bought in bulk with significantly low premiums.
When buying coins, divisibility is an important consideration and buying coins with different weights and dimensions gives you the flexibility to drip-feed small parts of your gold holdings into the market.
Buying gold bars
Gold bars are equally popular as an investment option and come in different sizes. Buying large bars can create problems when selling. A large gold bar can only be sold once. On the other hand, investing in bars of different sizes allows you to sell into the secondary market at different price points. This is an important strategy in maximising profits. It’s important to note that gold bars carry lower premiums when compared to coins. This is due to reduced production costs.
The serial number and fineness
stamp should always be on the face of a bar
Selecting a gold bar
When buying a bar, it’s important to check the purity. Most bars carry a purity of at least 99.9% and the purity number, serial number and refinery mark will be etched on the face of the bar. Gold bars are best bought from a specialist gold dealer. If the purchase is over £ 10,000, identification would be required. One can pay for smaller bars using a debit or credit card; however, larger bars can be paid for through a bank transfer.
Other forms of physical gold
Jewellery is also a popular option, especially in the Asian markets. Jewellery incurs large production and design costs. As an investment, it’s not the best option as the production costs cannot be recovered when selling. Raw, unprocessed gold nuggets can also be an option, albeit not a popular one.
Other gold-linked investments
There are other options in the market for investors who do not wish to hold physical gold. Exchange Traded Funds (ETFs) and shares of gold mining companies are recognised options for gold-linked investments. However, unlike physical gold, these investments carry counterparty risks. If the shares or the fund crashes during an economic crisis, the investments can become worthless.
jewellery can be ornamental, but not great as an investment
Setting time horizons
Gold has historically been an asset class that delivers returns in the medium to long-term. Therefore, it cannot work for investors looking for quick gains. When investing in gold, a 5 to 7-year window is ideal.
Understanding the price
The international gold markets run on a continuously changing spot price that is announced by COMEX in New York. This price is stated in USD per troy ounce. Interpretation of the price is critical when buying gold. The spot price needs to be divided by 31.103 to achieve a conversion in grams. The next step is to apply the prevailing currency exchange rate of US dollars to GBP, Euro, Yen or any other international currency.
Key considerations when buying gold
When investing in gold, it’s always better to buy in a quieter market. That way, lower premiums can be achieved and the spread between the buying and selling price is reduced. Gold can be an important diversification tool and a 10 to 15% exposure to gold within any overall portfolio can create stability and security and protect the overall portfolio. An important rule of thumb is never to incur debts when investing in gold. Diversification is all about converting existing asset classes within a portfolio to gold. Gold is also very tax efficient and VAT free in the UK. Gold coins that are legal tender are also CGT free.
Identifying a reputed dealer
A good relationship with a reputed dealer is very important for an investor to identify the correct market opportunities. A dealer of repute will always have a buyback guarantee and offer advice, clear communication and transparency. Reputed dealers can be identified by checking whether they are listed with an industry organisation like the BNTA.
Buying gold online
It’s a lot easier and safer to buy gold online from a reputed dealer’s website, rather than a gold shop on the high street. Most dealers have a quick and easy registration process and a wider choice of physical gold products on their websites. Secure payment options include bank transfers, debit and credit cards.
Securing your gold
Having purchased your gold, it’s important to opt for a secure storage option. Many reputed dealers will store your gold in an LBMA approved vault for a fee. A segregated storage option is the only way to go, which ensures that the gold is stored as a private holding, and not within a common pool.
Dealers will usually insure packages up to the doorstep when a home delivery option is chosen. But, it’s up to the investor to buy insurance for their gold products from there onwards. There are also many home safe options available in the market that’s worth considering for secure home storage.
Hopefully, this article has provided an insight into the important factors and considerations of the gold buying process. Investors are also advised to speak to an independent financial advisor before investing in gold.
There are several reputed dealers in the market who have released tutorial videos on buying gold. It’s also worth watching these as part of the research process before actually putting your money into the gold market. Happy investing!