When we first considered investing in gold, we were overwhelmed by the options. Should we buy physical gold bars? What about gold ETFs? And how does investing in gold mining stocks work? As we dug deeper, we realised that investing in gold in Belgium isn't as straightforward as it seems. Each method comes with its own set of pros and cons, and the tax implications can be complex. In this article, we'll walk you through the different ways to invest in gold in Belgium, helping you understand which option might be best for your financial goals.
Why you should invest in gold
Insurance against doom scenarios
What if the entire financial system collapses? There are risks that cannot be ignored. Governments are borrowing too much, which could lead to a situation where they cannot repay their debts. This could result in significant monetary devaluation. Wars and other geopolitical problems could also disrupt many investments. Globalisation might even shift back to protectionism, causing trouble for companies. In short, the world often looks bleak. So, how can you protect yourself against such a difficult, yet plausible scenario?
In the past, people often turned to gold and other precious metals as a safe-haven asset. The Romans were drawn to gold, seeing it as portable wealth that was separate from governments and their paper money. The Germans from 1921-1923, Argentines in the 1990s, and, more recently, Turkish and Russian savers have all sought refuge in physical gold. It has always been the exchange value that everyone accepts. Historically, gold has been seen as equal to value, protecting purchasing power in the long run.
Diversification in your portfolio
Gold's value tends to move independently of the stock and bond markets. In financial terms, gold has a low correlation with stocks and bonds. This means that including gold in your portfolio provides a diversification benefit, helping to reduce the ups and downs of your investments.
The chart below shows the correlation between gold and the MSCI World index. While there are periods with a high correlation, there are also many periods where the correlation is close to -1.
Insurance against a financial market calamity is useful. In a severe disaster, the price of gold would skyrocket. The question is, should this dominate your portfolio? You don't pay as much for fire insurance as you do for your whole house, right? So, it's wise not to invest more than 3% of your assets or 5% to 10% of your investment portfolio in gold. Investing a higher percentage is essentially betting on a huge disaster. But what are the chances of such a major financial disaster happening? It hasn't occurred in the last 100 years.
Hedge against inflation
Gold is typically seen as a hedge against inflation. Inflation causes prices to go up, and the idea is that the price of gold more or less follows inflation, preserving your purchasing power. However, research indicates that it may not be as effective as an inflation hedge as commonly believed.
How to invest in gold
Belgians have several options for to invest in gold:
- Physical gold offers tangible security but requires storage.
- Gold ETFs provide easy trading on stock exchanges.
- Stocks of mining companies allow exposure to gold producers.
- Futures contracts cater to sophisticated traders.
Each method suits different risk appetites and investment goals. Let's take a closer look at each one.
Physical gold bars and coins
You can buy physical gold from specialised dealers. This includes gold bars and coins that you can purchase directly. Popular coins for trading include the Napoleon and Krugerrand. Gold bars are available in various sizes, ranging from a few grams to one kilogram. However, be careful when buying online, as many websites are unreliable.
You own real gold, but you need to store it securely. That's why many Belgian investors store their physical gold in a safe deposit box at their bank for extra security.
Gold ETFs
Gold ETFs (Exchange-Traded Funds, also called trackers) aim to match the price of gold. They invest in gold directly, so you don't need to handle the physical metal. So they provide a convenient way to benefit from gold prices without worrying about storage and insurance. Plus, your gold is safely held by a custodian in your name, so you don't risk it being stolen. On top of convenient storage, ETFs also bring liquidity, meaning you can easily buy and sell your shares at any time through your broker.
Let's look the past performance of gold. In the last 45 years, the Gold spot price index (in EUR) had a compound annual growth rate of 5.9%.
Below are gold ETFs that are popular with Belgian investors:
The DE000A2T0VU5 ETF by Xtrackers is the cheapest, at 0.11% per year.
The bottom ETF is hedged to the Euro, meaning that it removes the neutralises the effect of the exchange rate changes between the EUR and USD. This type of currency hedging has a cost, which is why the ETF is significantly more expensive.
Stocks of mining companies
Investing in stocks of gold mining companies is another way to profit from rising gold prices. When gold prices go up, the value of mining company shares usually increases too. When gold prices fall, the prices of all gold mining companies also drop.
Keep in mind that mining companies face their own operational risks and financial challenges, which can impact their stock prices. This means that investing in these shares comes with its own set of risks. Instead of buying individual stocks of companies, you can also buy ETFs that follow the mining industry as a whole. Such an ETF will then consist of several stocks of different mining companies. The advantage of an ETF is that you don't have to research individual mining companies on your own. By buying a mix, you also protect yourself if one of them performs poorly.
An example of such an ETF is L&G Gold Mining (IE00B3CNHG25), which follows the DAXglobal Gold Miners index. It has returned an average of 1.95% since 2009. If you had invested €10,000 in 2009, you would have had around €13,000 today. Not exactly a great return. And you can tell from the graph that it is volatile too.
If you're interested in exploring further, here are some ETFs with mining companies we've selected for you.
Derivative products
For experienced investors who can handle higher risk, futures and options can be a way to bet on gold prices. These financial tools can bring big returns, but they also carry a high risk of big losses. It's essential to know exactly how they work and the risks involved before putting your money into them. Generally, we steer clear of these investments, and you should too.
Why you shouldn't invest in gold
It doesn't produce any value
The main problem of gold is that it does not produce value. If you invest in a stock, you get a dividend on top of the price. A bond generates interest. But a kilo of gold will still be a kilo of gold in 10 years' time and will not generate anything for those 10 years, except via possible price appreciation. On the contrary, it costs money to keep gold safe. Even if you invest in gold through an ETF as we've shown above, you will pay for holding the assets safe one way or another.
Warren Buffett also calls gold an "unproductive" investment, including in his 2011 letter to Berkshire Hathaway shareholders. "Unproductive investments will never produce anything, but people buy them in the hope that someone else, who also knows that these investments will be forever unproductive, will be willing to pay more for them in the future."
To make his point about gold clear, Buffett then imagines that he owns all the world's gold - at that time 170,000 metric tonnes - melted down into a cube of about 20 cubic metres. That mega-cube of gold would then be worth about $9.6 billion. With that money, Buffett notes, you could also buy all 400 million hectares of arable land in the US, as well as sixteen times the entire company Exxon Mobil, at that time the most profitable company in the world with a generous dividend. To then be left with a billion dollars.
So what would you rather own for the long term? Buffett himself does not have to think about it for long: "A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
Low expected returns
Because it's an unproductive asset, in the long run, gold yields a return barely above inflation. For instance, since 1900, gold delivered an average annual real return of just 0.8% (net of inflation, that is). During the same period, stocks returned an average 6.9% per year!
We've been seeing a similar trend in recent history. Between 1980 and today, the global stock index MSCI World returned an average 10.3% per year, whereas gold returned only 5.9% per year.
Volatile
Gold not just has lower expected returns than a productive investment like stocks, it is also more volatile. This means that the value of gold fluctuates significantly. Good investments compensate you for taking on additional risk through a higher return. That's not the case for gold. You get high volatility, yet also a low return.
Diversified ETF investing: better returns than gold
Rather than picking individual stocks such as Amazon or Microsoft, index funds are a way to buy the whole market, across all sectors and regions of the world. The most famous index is the S&P 500, which contains the 500 biggest American companies. Rather than only gold mining companies, stocks from all industries are in the index. For instance, large companies such as Apple, Alphabet or Tesla are represented in the S&P 500. This is offered to investors through an instrument called an ETF. Essentially you own a small portion of thousands of companies throughout the world. Instead of betting on a particular company, you are placing a bet on the global economy. Your investments are diversified, have a lower risk and a more consistent return.
For example, you can invest in a BEL 20 ETF and benefit from the performance of all the largest Belgian stocks. Or, you can invest in a global index like the MSCI World, which consists of hundreds of stocks from many different countries. This diversification is a big benefit of ETFs. You're not putting all your eggs into one cryptocurrency like Bitcoin.
ETFs perform on the long-term
Because ETFs simply track an index (which is why they're also called "trackers"), you're investing in hundreds or thousands of companies in one go. They are also low cost meaning you get to keep more of the returns.
But also, globally diversified ETFs invest in the world economy, which has grown tremendously over the last decades because of continued innovation. The IWDA ETF, which tracks the MSCI World index, returned an average 10.2% per year since 1980.
ETFs are tax efficient
A huge advantage for Belgian investors is that capital gains aren't taxed in the case of ETFs that invest in stocks. And the 30% dividend tax can be avoided by investing in accumulating ETFs rather than distributing ETFs.
You have to pay the Belgian transaction tax, which is known as the TOB. This tax is between 0.12% and 1.32% depending on the ETF.
Curvo: the easiest way to invest in ETFs
Choosing the right ETFs to invest in can be a challenge. But that's not all. You have to understand the intricacies of investing, comprehend the impact of taxes on your portfolio, learning how to use your broker, and know when to rebalance your portfolio. That's why we built Curvo. To make things easy so you can spend your free time on the things that matter most to you.
Get the best portfolio tailored to you and your goals
Invest in one of five portfolios, each optimised for a particular financial goal and appetite for risk. When you sign up, you're asked a series of questions to get to know you and learn what type of investor you are. Based on your answers, you are matched with the best portfolio. Your financial situation and goals (and even your attitude to risk) may change over time. That's why this process is repeated regularly to make sure that your investment strategy always remains aligned to you and your needs.
Diversification at its core
Each portfolio is globally diversified and invests in over 7,500 companies. That's a lot more than investing all your savings in gold.
All your money is invested
Your investments work with fractional shares. This means that all your money is put to work. There will never be cash sitting on your account doing nothing.
No transaction tax
There is a way to passively invest in ETFs while not having to worry about the transaction tax. At Curvo, all taxes are taken care of.
Invest sustainably
Sustainable investing is challenging because everyone has different beliefs and values. That's why your investments focus on one guiding principle: none of the portfolios invest in companies that are considered destructive to the planet.
Built for monthly investing
You can set up a monthly savings plan where your selected amount is automatically debited from your bank account and invested in your portfolio at the start of each month. This way, it's easy to adopt the best saving habits. Also, Curvo does not charge any transaction fees. And your investments support fractional shares meaning all your money is invested. So Curvo is ideal for monthly investing.
Conclusion
Gold's role in investment strategies has been debated for centuries. While it offers a hedge against economic instability, its performance as a long-term investment often lags behind more productive assets. The key takeaway is that gold might have a place in your portfolio, but it shouldn't dominate it.
For most investors, a diversified approach using ETFs can provide a more balanced and potentially more rewarding investment strategy. These funds offer exposure to a wide range of assets, often with lower fees and better long-term growth prospects than gold.
If you're intrigued by the simplicity and potential of ETF investing, you might want to check out Curvo. Our app simplifies the process, helping you build a diversified portfolio tailored to your goals without the complexities often associated with investing.