Could you make a mint with physical gold?

With fiat (government issued) currencies traditionally devalued by excessive money creation and inflation, physical gold is one asset that has been proven to hold its value over time. That’s one reason it has been used as money for thousands of years.

For example, using figures based on the Consumer Price Inflation Index, from 1973 to 2023 the pound lost approximately 93.8 per cent of its value. Even in a bank earning interest, the real value of cash only just about maintained its value, whereas gold more than doubled its value in real terms over the same period.

Moreover, as Adrian Ash, Director of Research at BullionVault, points out: “For UK investors and savers, gold has been the best-performing asset bar none, so far this century…Over the past 20 years, gold has risen more than 600 per cent in price.” 

The price of gold is influenced by various factors, and its value is determined by a combination of supply and demand dynamics, as well as broader market forces. Some of the key drivers of the price of gold include: 

Suki Cooper, precious metals analyst at Standard Chartered Bank, forecasts gold to average $1,835 an ounce next year (£1,472), rising to $1,921 an ounce (£1,541) in 2025.

She explains: “In 2024, we believe there are likely to be three key factors to watch. Firstly, the likelihood and timing of rate cuts across major central banks, decreasing the opportunity cost of holding gold. Secondly, US dollar strength peaking, removing a key hurdle for gold upside risk, and thirdly, central bank gold demand. Record central bank purchases have offset macro headwinds, keeping gold prices elevated above levels that the macro environment would have ordinarily pressured gold below.”

This contrasts with the view of Capital Economics’ commodities economist Kieran Tompkins, who forecasts gold rising in price to US$2,100 (£1,685) an ounce by end-2024. Yet, Bloomberg Intelligence’s senior commodity strategist Mike McGlone believes gold could hit $3,000 (£2,407) an ounce in 2024.

For purists, gold bullion in the form of either coins or gold bars is the way to invest in physical gold, as holding the physical asset involves no counterparty risk. You also don’t have to pay VAT when buying it. In addition, gold bullion coins produced by The Royal Mint are classed as CGT-free investments: this includes Britannia coins and Sovereigns. However, you may have the cost of storing the gold and are also advised to insure it.

Those security issues are solved if you buy and own gold inside specialist vaults. This enables you to buy grams of gold held in warranted-quality 400-ounce bars, where prices are much closer to the "spot" bullion price (that is, the wholesale market value of the gold they contain).

For small bars (up to 1kg), in contrast, you can expect to pay a premium of approximately 2-5 per cent and up to 10 per cent extra for coins. Moreover, when you come to sell, you’ll get anywhere from 2-5 per cent less than the "spot" price. 

One popular alternative to buying bullion is to buy an ETF backed by the value of large bars held in a vault, although this is often thought of as "paper" gold in contrast to the "real" gold. This is because the buyer of a physical gold ETF not only runs a counterparty risk but never actually owns gold. In essence, they only own a share that gives exposure to the gold price. Moreover, when they come to sell, they will only receive payment in fiat currency. 

As BullionVault’s Adrian Ash confirms: “In the end the shareholder is precisely that: the owner of a share. The trust then owns gold (or in some cases, has its debts denominated in gold). That makes the providers of the legal structure around the trust a potential point of risk. It’s also important to note that, given the way most shareholdings exist today, the shares are then held in a nominee account for the investor, meaning that they are exposed to their own stockbroker’s solvency on top.” 

While holding physical gold can be used as a means of diversifying the risks of investing, it’s generally acknowledged that only around 5-10 per cent of a portfolio should be in the precious metal. Moreover, it should always be borne in mind that no investment is entirely risk free.