15 questions to ask before investing in precious metals
Why hold gold or silver at all?
Bullion is a basic bolt hole. It is seen as a hedge against inflation and a store of value in the event of deflation. Gold and silver have value because governments cannot be trusted not to debase paper currency.
Physical metal or an exchange traded product?
True metalheads want the real thing - physical bullion within touching distance. An exchange traded product (ETP) may be an efficient way of owning gold or silver, but unless you withdraw the fraction of a gold bar that an ETP represents, it's really just an electronic book entry.
Gold or silver?
Gold is scarce and iconic. But like gold, silver has also been used for coinage for centuries. Gold is really for hoarding and for adornment, and as a hedge against the dollar. It has industrial uses, but these have less impact on demand for the metal than they do for silver.
What about VAT?
Gold bought for investment is free of VAT. Silver and other precious metals are not. But you can avoid paying VAT if the metal is held in an accredited vault in an allocated account. In that case, it only bears VAT if it is withdrawn in physical form.
Are there any other restrictions?
Owning bullion is hedged around by rules designed to combat money laundering. The first purchase of physical gold by any individual of more than £5000, or an aggregate purchase of gold of more than £10,000 in any 12-month period, will be reported to HMRC. Any new buyer of bullion has to provide the dealer with proof of identity and residence.
What about tax?
Active traders in bullion may find their activities treated as a business and get their profits taxed as income. Bullion is subject to UK capital gains tax, with one important exception. UK issued bullion coins, such as one-ounce gold Britannias, are technically legal tender and therefore exempt.
Are there other coins to which this exception applies?
Yes - gold sovereigns issued after 1837. Here, the bullion content equates to 0.2354 of a troy ounce. Some sovereigns have an extra numismatic value to collectors, but most do not. These are called 'bullion' sovereigns. They frequently appear at coin auctions, and usually sell to buyers at a price that reflects the current value of the underlying gold content, once the auction house premium (often as much as 20%) is factored out.
If I want to buy bullion, should I buy coins or bars?
Bullion coins, like Krugerrands or Britannias, have the advantage of divisibility. You can sell half your stash of one-ounce bullion coins, but you can't sell half a gold bar. The flip side is that bars are slightly cheaper to buy, because they cost less to make.
Is there any difference between different bullion coins?
No, but they come in great variety. The Krugerrand is the classic one, but there are also Britannias, Isle of Man Angels, Chinese Pandas, Canadian Maple Leafs, Austrian Philharmonikers and many others. They all weigh a troy ounce of the same gold purity, and therefore are identical. Similar bullion coins are available in silver and platinum. Half-ounce and quarter-ounce bullion coins are also made.
Who should I buy through?
The World Gold Council lists seven UK 'retail' dealers (without implying any recommendation or endorsement of them). These are: ATS Bullion, Baird & Co, Bullionvault, Gold Investments, Goldcore, and Harrods Bullion.
Of these, London-based Baird is also a refiner, producing bars to 'four nines' fineness. This indicates gold that is 0.9999% pure. Many dealers in collectable coins also buy and sell bullion coins.
What about storage and insurance?
Holding physical gold involves storage and insurance costs. If you have a safe, storing your bullion at home is a possibility. Just don't go bragging about it at the pub. Installing a safe rated for holding gold to a value of (say) £50,000 might cost in the region of £500 or so. Safes rated as good for larger amounts for insurance purposes cost correspondingly more.
Given appropriate security measures, you can normally add bullion to a household contents policy for only a modest additional premium. As with most insured valuables, you need to have proof of purchase to make a claim.
Can I put gold in a safe deposit facility?
Yes. Safety deposit facilities at normal bank branches are now limited. But for London residents, Selfridges has a long-established secure safety deposit facility with a minimum annual cost for a small box of £120. Harrods offers a similar facility, with charges starting at £235 per annum.
What should I avoid?
Most gold scams involve paying over the odds for a standard or sub-standard product. So be aware of the local currency price of an ounce of gold and refuse to pay more than a single-figure percentage premium over the spot price for it.
Be sure of the gold's purity before you buy. Deal with a reputable dealer, not a cold caller or a scheme marketed via direct mail.
What about commemorative coins?
Commemorative coins are a waste of time, as they have none of the scarcity that drives numismatic value and are usually priced well in excess of bullion content.
What about buying through eBay?
Provided you trust the seller, all that can be said is that eBay is better for buying bullion than buying collectable coins or any other items where condition is a major factor in determining price. Condition isn't an issue here, but you do need to be sure the bullion is the genuine article.
A South African coin first minted in 1967 that consists of one ounce of 22-karat gold. It was introduced as a means of increasing the private ownership of gold in South Africa and was originally intended to circulate as currency. As numerous countries banned private ownership of gold bullion, investors in the USA and the UK could hold gold coins and so began to hoard Krugerrands illegally, as some countries banned the import of Krugerrand as part of sanctions against the apartheid South African government. More than 50 million Krugerrands have been minted since 1967.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
This is the opposite of inflation and refers to a decrease in the price of goods, services and raw materials. Economically, deflation is bad news: the only major period of deflation happened in the 1920s and 1930s in the Great Depression. Not to be confused with disinflation, which is a slowing down in the rate of price increases. When governments raise interest rates to reduce inflation this is often (wrongly) described as deflationary but is really an attempt to introduce an element of disinflation.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.