There are a number of things to think about when you buy gold that do not apply to other assets. The author of this guide has 20 years experience of researching and practicing the best ways to buy gold. A good place to start is to understand how gold is different to other assets and hence why you might want to buy gold.
The main difference between gold and many other assets is that gold can be owned without counterparty risk.
Gold compared to paper money
Paper money (eg sterling) has no intrinsic value, but derives its value from government decree that it must be used as money to pay taxes. Paper money carries the counterparty risk that it can be de-valued by governments printing more of it – “Paper money eventually returns to its intrinsic value – zero.” (Voltaire, 1694-1778).
Gold does not have this counterparty risk because it can not be printed by governments, but has to be extracted from the ground. Therefore gold has intrinsic value due to its scarcity and desirability. So gold can be a much better store of value than paper money, especially when its value is being eroded through printing.
Gold compared to bank accounts
When you transfer paper money to a bank account, the ownership of your money is transferred from you to the bank. You are effectively making an un-secured loan to the bank which can do whatever it wants with the money. Because your loan is un-secured, you are last in the queue to get your money repaid in the event that the bank becomes insolvent. Although some of your money may be covered by a government backed insurance policy, in reality there is not enough money to pay back all the insured deposits in the banking system. So when you put money in a bank there is counterparty risk that you may not get the money back if the bank goes bust.
Gold is different to money in a bank because gold can be stored in a vault without ownership being transferred to the owner of the vault. Ownership of the gold can be retained by you irrespective of the solvency of the vault owner. So if the vault owner goes bust you can still get your gold back. There is no counterparty risk because your gold is not the vault owner’s liability, unlike money in a bank.
Gold compared to property
Property is often bought with debt. The cost of that debt (or interest rate) is set by banks, which can impact the affordability of property and hence the price of property.
Gold is not usually bought with debt. So, unlike property, the gold price is not likely to be impacted by changes in interest rates in the same way.
Gold compared to shares
Shares are often bought through centralised exchanges which are regulated by government. The price of shares, like property, can also be impacted by changes in interest rates because the underlying companies often use debt in their businesses and shares are sometimes bought using debt (ie on margin).
Gold is not usually bought with debt. So, unlike shares, the gold price is not likely to be impacted by changes in interest rates in the same way. Gold is not bought through centralised exchanges which are regulated by government.
Gold compared to crypto currencies
The ownership of crypto currencies can only be verified on the internet.
The ownership of gold is verified by physical ownership and not dependent on the internet.
Gold advantages
Gold can be considered as private money without the counterparty risks described above.
Tax on gold
There is no sales tax (VAT) on the purchase of gold in most relevant countries. Any capital gains made on the sale of gold are taxable after using up the owner’s annual capital gains tax allowance. Some coins are exempt from capital gains tax as they are legal tender.
When deciding how to buy gold, it is worth considering the gold buying options.