Precious metals: To have or to hold?

Interactive Investor's discussion boards have been going crazy with vigorous debate about the best way to hold precious metal - physical or synthetic. We asked regular columnist, investor and numismatist Peter Temple to examine the argument.

Why hold gold or silver at all?

Bullion is a basic bolt hole. It is seen as a hedge against inflation and a store of value in the event of deflation. Gold and silver have value because governments cannot be trusted not to debase paper currency.

Physical metal or an exchange traded product?

True metalheads want the real thing - physical bullion within touching distance. An exchange traded product (ETP) may be an efficient way of owning gold or silver, but unless you withdraw the fraction of a gold bar that an ETP represents, it's really just an electronic book entry.

Gold or silver?

Gold is scarce and iconic. But like gold, silver has also been used for coinage for centuries. Gold is really for hoarding and for adornment, and as a hedge against the dollar. It has industrial uses, but these have less impact on demand for the metal than they do for silver.

What about VAT?

Gold bought for investment is free of VAT. Silver and other precious metals are not. But you can avoid paying VAT if the metal is held in an accredited vault in an allocated account. In that case, it only bears VAT if it is withdrawn in physical form.

Are there any other restrictions?

Owning bullion is hedged around by rules designed to combat money laundering. The first purchase of physical gold by any individual of more than £5000, or an aggregate purchase of gold of more than £10,000 in any 12-month period, will be reported to HMRC. Any new buyer of bullion has to provide the dealer with proof of identity and residence.

What about tax?

Active traders in bullion may find their activities treated as a business and get their profits taxed as income. Bullion is subject to UK capital gains tax, with one important exception. UK issued bullion coins, such as one-ounce gold Britannias, are technically legal tender and therefore exempt.

Are there other coins to which this exception applies?

Yes - gold sovereigns issued after 1837. Here, the bullion content equates to 0.2354 of a troy ounce. Some sovereigns have an extra numismatic value to collectors, but most do not. These are called 'bullion' sovereigns. They frequently appear at coin auctions, and usually sell to buyers at a price that reflects the current value of the underlying gold content, once the auction house premium (often as much as 20%) is factored out.

If I want to buy bullion, should I buy coins or bars?

Bullion coins, like Krugerrands or Britannias, have the advantage of divisibility. You can sell half your stash of one-ounce bullion coins, but you can't sell half a gold bar. The flip side is that bars are slightly cheaper to buy, because they cost less to make.

Is there any difference between different bullion coins?

No, but they come in great variety. The Krugerrand is the classic one, but there are also Britannias, Isle of Man Angels, Chinese Pandas, Canadian Maple Leafs, Austrian Philharmonikers and many others. They all weigh a troy ounce of the same gold purity, and therefore are identical. Similar bullion coins are available in silver and platinum. Half-ounce and quarter-ounce bullion coins are also made.

What do one-ounce bullion coins cost to buy?

The spot gold (or silver) price, plus a small (non-refundable) premium. This premium varies from coin to coin and on the quantity you want to buy. Some bullion dealers may charge a lower premium on a range of one-ounce bullion coins if you allow them the option of supplying whatever they have in stock.

This 'dealer's choice' option might be a premium of 7% for a single coin, or a 5% premium for a batch of 25. Since an ounce of gold is worth the same whether it is in the form of a 'Panda' or a 'Krugerrand', the choice of bullion coin scarcely matters.

What about smaller coins and bullion bars?

Half-ounce and quarter-ounce products attract a higher percentage premium. Small bars, which come in a range of sizes, from one ounce to a kilo, have a lower percentage premium the heavier they are. Newly-minted coins can attract a surcharge in the year they are minted. This is simply a reflection of scarcity, and additional handling costs.

Who should I buy through?

The World Gold Council lists seven UK 'retail' dealers (without implying any recommendation or endorsement of them). These are: ATS Bullion, Baird & Co, Bullionvault, Chard, Gold Investments, Goldcore, and Harrods Bullion.

Of these, London-based Baird is also a refiner, producing bars to 'four nines' fineness. This indicates gold that is 0.9999% pure. Chard is a jeweller and bullion dealer based in Blackpool. Many dealers in collectable coins also buy and sell bullion coins.

What about storage and insurance?

Holding physical gold involves storage and insurance costs. If you have a safe, storing your bullion at home is a possibility. Just don't go bragging about it at the pub. Installing a safe rated for holding gold to a value of (say) £50,000 might cost in the region of £500 or so. Safes rated as good for larger amounts for insurance purposes cost correspondingly more.

Given appropriate security measures, you can normally add bullion to a household contents policy for only a modest additional premium. As with most insured valuables, you need to have proof of purchase to make a claim.

Can I put gold in a safe deposit facility?

Yes. Safety deposit facilities at normal bank branches are now limited. But for London residents, Selfridges has a long-established secure safety deposit facility with a minimum annual cost for a small box of £120. Harrods offers a similar facility, with charges starting at £235 per annum.

Are there cheaper ways of getting exposure to physical bullion?

If you are prepared to trust a financial institution to hold it on your behalf, bullion can be kept in an allocated account for limited cost. An allocated account gives you title to a specified amount of gold (or silver) that can be withdrawn in physical form on request. Bullionvault, for example, will buy and sell bullion for 0.8% commission and keep holdings in an allocated account for 0.12% per year.

What should I avoid?

Most gold scams involve paying over the odds for a standard or sub-standard product. So be aware of the local currency price of an ounce of gold and refuse to pay more than a single-figure percentage premium over the spot price for it.

Be sure of the gold's purity before you buy. Deal with a reputable dealer, not a cold caller or a scheme marketed via direct mail.

What about commemorative coins?

Commemorative coins are a waste of time, as they have none of the scarcity that drives numismatic value and are usually priced well in excess of bullion content.

What about buying through eBay?

Provided you trust the seller, all that can be said is that eBay is better for buying bullion than buying collectable coins or any other items where condition is a major factor in determining price. Condition isn't an issue here, but you do need to be sure the bullion is the genuine article.

Peter Temple's book,'The Handbook of Alternative Assets', is published by Harriman House.

Looking for the lowdown on gold and other safe-haven investments? Take a look at Interactive Investor's focus on precious metals.