The Shapes of Gold

As we saw in our previous post, the advantages of investing in gold are as numerous as its uses, but if you decide to invest in gold what will you actually be buying? The answer may not be quite what you imagined…

Metal or paper, commodity or currency? What, exactly, is investment gold?

For most of us, the first thing that comes to mind is a vault full of gleaming yellow ingots, but in reality, investment gold takes a wide variety of surprisingly different forms.

For a start, many investors choose to buy “paper gold” rather than “physical gold”. The term “paper gold” essentially refers to paper, digital and financial proxies for the metal itself; in other words, any assets or investment instruments that reflect the price of gold. These range from shares in gold mining companies to gold futures, shares in ETFs (exchange-traded funds) and mutual funds, or gold certificates that can be redeemed on demand for the physical gold bullion that they represent.

There are, of course, advantages and disadvantages to every form of investment but, on the whole, paper gold’s appeal lies in the speed and ease with which it can be traded, stored and transported.

Some forms of paper gold are backed by physical gold held on investors’ behalf in high security vaults, and some (gold futures and spread betting) are entirely intangible, with investors effectively buying not the metal itself but a price for the metal. In fact, a huge percentage of the gold traded on international markets every day is now “notional” rather than “deliverable”.

However, for investors more interested in gold’s value as a means of mitigating risk rather than short-term speculation, outright ownership of physical gold remains an important form of mid-to-long-term “insurance”. Physical gold might not be cash-generating but it presents no risk of default. Investing in real gold means owning a physical asset that is liquid, portable and divisible (after all, unlike a well-cut diamond a gold ingot can be melted down and still retain its value), and where confidentiality is an issue, to some extent physical gold also offers greater privacy than paper assets.

Adding to the appeal of physical gold, in the UK bullion coins that are recognised as legal tender are exempt from capital gains tax (these include the twenty-two-carat gold Sovereign and the Britannia, which has a face-value of £100) and since 2014 gold bullion bars can be held within a self-directed pension scheme. Thanks to the EU Gold Directive of 2000, all investment gold is also currently VAT exempt.

But even “physical gold” comes in many different forms and not all gold is bullion…

Ingots, coins and jewellery

“Gold bullion” is often, erroneously, assumed to mean the standard 400-troy-ounce brick-shaped gold bars or ingots of the kind seen in Hollywood heist movies (also known as “good delivery” gold bullion bars). In reality not only are gold bullion bars or ingots available in a wide range of sizes, the smallest of which weigh as little as 1 gram, but the term bullion sometimes also refers to coins.

Somewhat confusingly, HMRC define “investment grade gold bullion” as gold, “of a purity not less than 995 thousandths”, valued by weight and “in a bar or wafer form”, but the Royal Mint produce “Bullion” coins which are “bought for their intrinsic qualities and to be kept as a store of value”. So, bullion coins are literally ‘worth their weight in gold’ – in contrast with products such as the Royal Mint’s “Proof” or “Brilliant Uncirculated” coins which are produced in smaller quantities and finished to a higher standard, and therefore have additional value as collectibles.

Investors who choose to buy coins rather than gold bars do so for a variety of reasons. Some simply want to invest a smaller amount of money than is required to buy a gold bar. Some are interested in liquidity and the fact that gold coins can be sold individually or in small quantities. Some prefer “numismatic” coins which, thanks to their rarity and beauty, are often worth a great deal more than the value of the gold they contain: these, like works of art and other antiques, are often seen as a long-term investment.

Like numismatic coins, gold jewellery is an exceptionally portable means of storing wealth, and is valuable for its craftsmanship and beauty as well as its gold content. Gold jewellery has been prized throughout history and across cultures but, according to the World Gold Council, China is currently the world’s fastest growing market. Over the last ten years demand from China has outstripped even Indian gold consumption, although Indian families remain major consumers of gold jewellery despite last year’s unusual fall in demand (which was largely connected with demonetisation and an increase in excise duty but was also influenced by a countrywide jewellers’ strike). Almost 50% of the gold purchased in India every year is bought for weddings, and bridal jewellery represents almost a quarter of the country’s gold consumption.

British Asians have maintained the Indian tradition of purchasing and gifting high quality gold jewellery and it remains an important form of long-term investment for many families. In fact, over recent years the UK as a whole has been Europe’s largest market for gold jewellery in all forms.

Protect and insure your investment gold

Whether the investment gold you purchase takes the form of heirloom jewellery, coins, gold bars or a paper certificate, one of the best ways of keeping it safe is renting a safe-deposit box. If you are looking for a reputable safety deposit centre, the Safety Deposit Association website is a good place to start.

And don’t forget to insure the contents of your safety deposit box, because nothing is ever as precious as total peace of mind.

My Security Box is the UK’s leading provider of insurance for security boxes and we offer specialist insurance cover for the contents of individual safe deposit boxes held in an unrivalled number of security box centres and international banks. For further information about insuring your investment gold please contact us, or go to any page of our main website for an instant online quote.