Full Transcript
Dr James:
There is a question that I get asked all the time, and that question is how can I gain some exposure to the gold markets? How can I diversify out of my current holdings and into gold? Well, actually, interestingly, there’s four fundamental ways you can do this. But first of all, why would we diversify into gold? Well, actually, the reason why most people invest their money is to grow their capital at the greatest rate, in a proven way. Now here’s the thing. That is a very operative thing to understand. We need to understand every component of that sentence. We have to grow a capital. Obviously, that’s a given. We want to outpace inflation. We have to grow it at the greatest rate, because we want the greatest rate of appreciation. We want to show that it grows consistently and that the rate that it grows at outpaces inflation by the greatest amount possible. But here’s the thing that would mean that we just potentially buy wacky things that grow at incredible rates like 30, 40, 50% a year. All of this stuff consistently. Now here’s the thing. The next part of that definition is that it has to be consistent and invest in assets which have done this over huge amounts of time in a proven way. Therefore, we have to know that historical data would suggest that they’re going to continue to grow, and as long as something satisfies all those things, then it is potentially a good long term investment. Now, for most people, what they do is they invest in paper assets. They invest in the stock market. What are paper assets? Paper assets are assets that are traditionally recorded on paper. Obviously, if you hold a portion of a company that is not tangible, that is traditionally recorded on a piece of paper, although nowadays it’s digital and it’s exchanged amongst other parties. It’s exchanged amongst other individuals for a price. Traditionally, that’s recorded on paper. Therefore, it is a paper asset. It is not tangible. It’s only worth as much as someone else will pay for you because of how much they believe the company to be worth and also because of how much they expected dividend on that particular stock to yield in the example of stocks or in the example of bonds, the coupon rate. But of course, all of these, as I say, are recorded on paper. They’re only as good as the promise. They’re only as good as the promise from that company to fulfill their obligations or the promise from the entity that has created the bond. So therefore, should those companies or entities fail, then those paper assets are not worth anything, Whereas something like gold, which is tangible, will always be worth something, because gold is the original form of money. It has always had value since ancient times and the reason for that is pretty much fundamentally because it looks beautiful. That’s pretty much why it’s got an amazing luster and it does not tarnish. That is why, once upon a time, there was an agreeance amongst society not anything formal, we just accepted that there was a pervading opinion that gold was worth something because it looked beautiful. There was consensus amongst others that it did Not for any other reason other than it looked good. The value of gold versus its actual practical usage is vastly, vastly, vastly mismatched. The value of any other material, any other metal, is pretty much determined by its practicality and its usage. In gold, it’s obviously very valuable. However, it is not actually utilized in that many things, at least relative to its value, of course, because what that means is that, basically, because we all think it looks good, we need to be valuable. Therefore, the prices driven up. This is literally why gold is worth more than any other metal because it looks good and there is consensus among society that we all think it looks beautiful and obviously there’s like a runaway effect there that as soon as a lot of people think it looks beautiful, other people jump in the bandwagon to not actually a huge thing. That drives price gold. But having said that, actually traditionally the historic rate of appreciation of gold is about six percent. Six percent since the nineteen hundred. Where is the stock market is about ten percent. So really, if we’re going to invest in something that consistently appreciates the greatest rate In a proven fashion with lots of historical data, then really the stock market traditionally has done, which is a paper asset. So why do people invest in gold if it doesn’t appreciate at the same rate as the stock market? Well, the reason why they do that is because they want to diversify away from global capitalism, because if the world’s economy fails, if the world’s government fails, then all our paper assets aren’t worth anything because all those promises are broken. Those promises can be fulfilled. But as long as there’s human beings, there’ll probably be consensus that gold is worth something and that is why people buy gold. That is why people hedge against the failure of capitalism by purchasing some gold, so that they have skin in the game should that situation arise. That’s literally the reason why people do it. They’re called gold bugs is the technical terminology. But here’s the thing we don’t have to believe in impending Armageddon to have some involvement in the gold market. We might just say actually I’m gonna diversify, actually I’m gonna have A little bit of this and a little bit of that. I’m gonna have skin in both games. So what that means is that I’m covered either way, and that’s the main rationale that people do that. So, on that note, onwards onto the four ways that you can gain a stake in the gold Asset category, how you can diversify out of the global stock market and begin to have a portfolio that is also got gold as a constituent. But you must understand the four ways that you can own some gold in order to do that. So, first and foremost, let’s talk about physically only some gold. What is that? Until it entails for purchasing quantities of gold from an online broker or an offline broker. Others find you get the gold in physically, in your hand, you take it and you do what you like with it. Now, obviously, that brings into consideration issues with custody, given that we now have to find somewhere store gold. Do we store it in our house? Do we store it under a bed. Do we? Do we bury it in the garden? Do we put in a pillowcase? Do we find some other Place or location to store inside our house? Well, we can. However, should someone catch wind of the fact that we have golden house and really the bucket hands with us, when, if they can, come to the house and be able to take the gold, there’s no Other way that that gold can be retained, because in accepting the gold, in purchasing it and having it physically in our hand, we also accept responsibility for it, and so, therefore, this is the thing that puts people off her single in this form. However, should there ever be this catastrophic scenario or arm again like situation, where the world’s, the world society collapses because, remember, paper assets are not worth anything, is probably meant that the world’s economy is collapsed at that point, in which case Then societies probably collapsed as well, because that’s the thing that underpins society. So You’ve got your gold and you’re storing it and you want to be able to say that you’re truly diversified away from the goals, the world’s economy, truly diversified from the way world’s economy, then you must physically on your goal, because then you’re staying true to the time on reasons or rational as to, one might purchase it. If we truly are gold bug and we truly believe in that philosophy, we must accept the darn side of the custody issues as well. So there’s no real perfect situation. There’s no real perfect scenario here. Right, we own the gold and therefore we have to store it somewhere. Therefore, we have to retain it right. And the second that we go and store it somewhere else and give it to another party, we’re actually letting go of some of that custody, which is the whole rationale between, the whole rationale why which people purchase it in the first place. So here’s the thing we got to understand this paradox, or this duality, and understand that actually there’s this limitation either way, no matter what we do. So here’s the thing when you purchase your own gold, when you sell the gold on, naturally, if it’s over a certain amount in terms of value, you’ll be liable for capital gains tax. That’ll either be 10 or 20% depend on your income tax bracket. However, it is worth knowing that you can purchase gold coins from the Royal Mint and when you sell them on, actually you’re not liable for any capital gains tax, which is a really, really, really cool thing at the time of recording, which is the 25th of April 2023, worth knowing, because that means that you can own gold and you can sell it on and you can participate in being diversified outside of the Global capitalist system and you have a perk and I will use a huge park in there. Of course, obviously, you still have to understand that custody is potentially an issue Depending on how we store that gold. However, when we want to say we’re a true gold bug, when we truly want to diversify away from the global economy except the fact that gold traditionally doesn’t appreciate at the same rate as the stock market Then we have to store our gold physically. We have to own a gold physically and have it in our hand. In my opinion, what is the second way we can purchase some gold? Second way is to buy some physical gold in whatever quant that we like and have someone else up store it on our behalf. Now, there’s many brokers online that do this. Actually, they often give you the option of being able to store it in different locations around the world. I’ve seen Singapore, I’ve seen New York, I’ve seen London. The reason why they give you a variety of governments to choose from is that it’s not been unheard of entirely in the past that the government has requisitioned gold. So, depending on how stable you think the government is in that particular locale, you will naturally have a proclivity towards storing your gold in that area if you believe the government to be strong, if you believe the government to be not likely to default on its debts and repossess everybody’s gold. This has literally happened before. Not very common not going to say it’s going to happen tomorrow, but it has happened. There’s been a historical president there which is crazy. So here’s the thing you can purchase gold in this way. You can have someone else store it for you. They will charge you a holding fee. Normally it’s going to vary based on the provider. The thing to be wary of is have you actually seen that gold with your own eyes? How do you know that whoever has sold you that gold is being fully honest, that actually, for every unit of gold they have sold, they actually have that exact same quantity of gold stored in the vault somewhere, because nobody checks these things. Maybe they have 10 kilograms of gold in total, but they’ve sold 30 kilograms worth of gold coupons or ownership to the people. They’re banking on the fact that not everybody’s going to withdraw their gold all at once, only some people will. Some people will just leave it there forever. This is the thing. This happens. There’s no way to prove this, there’s no way to independently verify this, so this is something we’ve got to be aware of. So, actually, if we buy gold in this way, are we contravening the true purpose, the true main philosophy of purchasing gold in the first place, which is that we want to diversify out of global capitalism? Because the thing about it is, if that situation arises where the economy fails, then guess what? The company that holds our gold is also going to go broke too. Where are their debtors going to go in order for them to be remunerated, in order for them to be repaid? Where are their creditors going to go in order for them to be remunerated? They’re going to go to the company’s assets and sell those. And guess what? The really smart people, the really smart creditors, get present in terms of how much they get remunerated over JoeBlogs. They’re way down the line. Joeblogs is way down the line in terms of stakeholders in the company, and they’re actually very clever because when they lend money to the companies, they make sure that they have that present. They make sure that they have that priority Something to be aware of. Personally, I probably wouldn’t purchase gold in this fashion because actually it’s not aligned with the main reason why people buy it in the first place. In my opinion, the main philosophical argument for purchasing it is to say that you’re diversified outside of the global economy and that you are, to a greater or lesser degree, a gold bug is the terminology. Third way we can buy gold you can buy shares in gold companies. Naturally, as gold goes up in price, the main asset of the company, the main product of the company, also goes up in price. Therefore, the companies become more profitable. Therefore, they make more money. Therefore, the share price goes up. Therefore the dividends go up. Okay, and we can see now how we’ve got exposure to gold. However, we also have exposure to the global stock market, which is exactly the thing that we might be trying to avoid by purchasing the gold. But you just got to consider to yourself do you want to do it in a convenient way or do we want to actually have custody of this gold? Now, the cool thing about buying gold stocks is that we can buy them in our asset or we can buy them in our sit, potentially Now, depending on if we bought an individual company or an ETF. We might be subject to the risks involved of buying an individual company, in that it can go bust because the global gold market is probably going to continue, but individual companies within that might fluctuate in and out of existence. So therefore, we have exposure to gold, yes, but we also might be overly exposed. We might be overly exposed to individual risk of one particular company. Therefore, we need to be wary of this right. So this is when a little bit of an understanding of risk comes in. If we’re exposed to, if we’re purchasing a gold ETF, is it an active ETF with huge fees? Is it a really well diversified active ETF? We have to consider all these things whenever we’re purchasing gold in. This means Big pro is that if it’s in an ISA and if it’s in the SIP, then naturally all the appreciation is going to be tax-free, you know, on the money that’s already within those tax wrappers. However, of course, we’re not actually truly diversified in gold because you don’t physically have it in your hand and of course, should the world economy collapse, then naturally these are going to collapse too, not that I’m going to say that’s likely. All I’m saying is that if that is your philosophy, and if that is the reason why you purchased gold, which for me is the main argument in purchasing it, or for me is the main reason that someone might do it and actually if that is our belief, then it’s actually at odds with purchasing gold in this way. Good for thought, but it is convenient though. Fourth one spread betting. What is spread betting? It’s, in essence, betting on whether or not the price of an asset will go up or down in value. When we bet in this way, then what it means is, if we bet that asset will go up in value, then naturally we’ll make money and then we’ll close our position and we’ll be up. We can bet on the price of gold going up and down. We can bet on the price of gold companies going up and down, and what it means is we can get exposure to gold via this means. Of course, spread betting is not for the faint of heart. The cool thing is it’s tax-free in the UK. It’s actually illegal in America, but it’s legal in the UK. It’s tax-free in the UK because the class is gambling. Winning from gambling is tax-free, as you may or may not know. However, of course, it’s not for the faint of heart. There’s got to be a lot of technical knowledge there in order to use these platforms and also, in likelihood, it will require active management of your position, because you’re going to have to monitor whether or not it goes up or down. So certainly it’s not something that we want to do, at least at the very beginning, to get some exposure to gold. But it may wish, you may wish for it to be something that you consider with time, whenever you’re experienced and investing. The cool thing is that you now know it exists, so therefore, you know that’s out there. So, should you believe that you want to purchase some gold, should you believe that you want to get actively involved in owning gold as an asset? These are your four ways to do it. It’s just about picking the one that’s most aligned with the outcome that you saw.