Is gold too simple for your savings?
Jan Skoyles, from The Real Asset Co research desk, looks at why gold investment may well be the oldest option for your pension but it also the safest and most proven option. Whilst the gold price has climbed, pension values have declined. With the finances of the future in such dire straights, surely we should be looking for safer havens for our pensions?
As we start 2012 with news that nearly a quarter of 16-24 year olds are unemployed and economic growth is close to zero, it is disheartening to think of how the finances of younger generations will turn out.
Whilst many of us contribute to pensions with our retirement in mind, we also hope to able to give our children and younger relations help during major points in their lives, whether it be for university, their first house, a wedding or their first child.
There is little doubt that over the last few decades the various options of where to place our savings and pension pots have grown by an inordinate amount. Add to this the growing concern as to the safety of our money and the levels of return it is little wonder that many are left feeling confused as to where is best to start setting aside money for both their own and their family’s future.
Most weekend supplements are full of suggestions as to which is the best tax-break for your pension pot, or the best place to put this year’s £10,860 ISA allowance. But really, for those who rely on savings or will be in the near future, very few prospects look as promising as they did when previous generations were planning their retirement.
Savings losing purchasing power
In the UK, there is now £1.1 trillion on deposit, but there are a plethora of complex and confusing products offered to savers. Some of the marketing practices behind these products can even feel predatory. Yet, it is sadly easier to apply for a credit card, with 0% interest, than it is to apply for a long-term savings account.
Despite a 2011 statement from the Treasury promising to make savings products more accessible (both in applying for and in understanding), this is not just what all savers are looking for. When putting away your life’s savings you are most concerned about the return of your capital, and then the return on your capital, when it comes to the time you plan to use the money.
Pension funds are typically invested in a mixture of bonds and equities, with maybe some cash. It could be argued that with a rise in asset prices, the value of the pension pot will also rise. However, whilst many savings and investment vehicles are about capital appreciation and dividend payments, it should also be about value preservation, i.e. even if your investment grows does it increase, or at least maintain, its purchasing power?
The asset purchase programme currently being carried out by the Bank of England’s Monetary Policy Committee is designed to help boost the economy and help to keep individuals spending and companies investing. The bank rate has been ‘maintained’ at 0.5% since March 2009. This was also when Quantitative Easing began.
This is all very well but unfortunately it’s no good for savers. The current level of inflation, 3.7%, means that many savers will now be experiencing a negative rate of return on their savings. £41.8 billion a year is confiscated from pensioners and savers as a result of this. The Centre for Economic and Business Research estimate the bank rate will stay this way until 2016.
So, how can we secure our savings with the same satisfaction and guarantee felt by previous generations? Perhaps it is worth looking past the complicated savings options and pension funds in order to try and secure your wealth for future generations. Sometimes, when it comes to storing your wealth less is more.
Gold investment, the sensible option
Many of the products which we find ourselves putting our savings into these days are relatively new compared to the age of money. When it comes to our money and our financial futures, perhaps we should just stick to what we know.
We’re talking about gold. The yellow metal has featured heavily on and off in the money pages in recent years. Many have decided to disregard it as a sensible investment option whilst a few have begun to warm to it and see it as something which is worth a small amount column inches.
The reason so many shy away from it, is because it seems too simple. Because it now seems too old fashioned to invest your money in something which physically exists, something which we dig out of the ground, and something which you can own entirely without risk of another entity (i.e. the bank) losing it.
The beauty of investing in gold is that it has historically proven itself to protect all wealth against all the things which holding your wealth in banks or other equities are unable to do. Gold has been used as a store of wealth since before the birth of Christ; it is only in the last century that we have turned our backs on it.
Purchasing power of gold
The price of gold is not just driven by how many people want to buy it, as is the case for many commodities. It is driven by the economic outlook – inflation, the currency bubble, sovereign debt and discord in central banks. All of these drivers are still very much in existence, with many continuing to get worse.
In 1900 a troy ounce of gold cost £4.25. If you had £100 to invest in 1900 and had just placed it in a bank account, this would now be worth approximately £8,440 according to measures using the Retail Price Index. This isn’t thanks to interest rates and the increasing value of the pound; it is actually down to inflation. Therefore the purchasing power of your money has decreased. Had you bought gold with this £100, you would have bought 23 oz. Today, this would be worth £25,553.
Since 1967 the British pound has lost 90% of its purchasing power, whilst several studies show that gold has maintained its purchasing power since the reign of Queen Elizabeth I. Not only this, but in times of economic distress gold has proven itself as a far better wealth preserver than other assets one normally places their money in.
The most simple explanation for the pound’s loss of purchasing power is the continued devaluation through inflationary policies implemented by governments in the latter half of the 20th Century. The qualities of gold as an investment and safe haven make it a perfect antidote to the damage of political and economic policies on money.
Gold has history
Many of those who disregard gold as a sensible investment for your wealth do so by looking at the price fluctuations over recent years. However, one need only look briefly at the social and economic history of not only Britain but also the US, Germany, Japan and France to see that over the long-run the yellow metal has consistently returned to historic purchasing power parity against intermediate products and other commodities.
No-one is able to predict what will happen in the markets, but with even less accuracy can they predict what will happen in the economic, political and social landscape. History can’t tell us what decisions individuals may make, but it can tell us what asset class humans intrinsically believe in. Gold.
Gold investment is simple
Applying for a savings account, an ISA or a pension scheme can be a long winded process thanks to money-laundering regulations. It is ironic that it is easier to sign up for a credit card than it is to deposit your money in a bank.
However, making an investment in gold can be simpler than opening a current account. You own the gold in your name and store it in a secure vault. After registering an account with a provider of physical gold ownership, all you need to do to fund your account and get started is make a bank transfer. You can then buy gold easily whenever you so choose. It is like a bank account for gold. The cost of storage (and insurance) is nothing compared to the price of inflation, it’s just a fraction of the gold price at 0.12% per annum.
When you use one of these platforms you have legal title to the gold you buy; the industry phrase is ‘fully allocated’. Because it is yours there is no counterparty risk, compared to having your money in an ISA or bank account where the safety of your money depends on the success of the bank.
Once you have bought your gold, you can sit back and relax. Like a savings account, ISA or pension fund it is best to leave it alone for the foreseeable future. Yes, there will be changes in the gold price, but you can be sure that your investment will hold its value and purchasing power over the long term, something which your other investments cannot guarantee. Now, won’t that be nice to tell the grandchildren?
For more information about using gold and silver as alternatives to the fiat money system, and for how gold investment fits into this bigger picture, follow us on Twitter and ‘Like’ us on Facebook. You can also watch interviews with politicians, academics, professional investors and traders on our YouTube channel.
Since writing this article, The Real Asset Co. has launched the Buy Britain’s Gold Back campaign, find out how you can join in, or read more about it, below.
Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.