Gold Academy · Lesson 7

Gold vs UK bonds

Bonds pay you an income. Gold pays you nothing. So why do so many careful UK savers hold both? Because they protect you from completely different problems.

Reading time: 4 minutes · Plain English, no jargon

What UK savers usually mean by bonds

Three very different things get called bonds in Britain. Gilts are loans to the UK government that pay a fixed interest rate, called the coupon, and repay your capital on a set date. Premium Bonds from NS&I pay no interest at all, but enter you into a monthly prize draw with tax-free winnings. Corporate bonds are loans to companies, paying more interest in exchange for more risk.

All three share one feature: they are promises. You hand over your money and rely on the government or a company to pay you back.

What bonds do well

• Income. Gilts and corporate bonds pay regular, predictable interest. Gold never does.
• A known end date. Hold a gilt to maturity and you know exactly what you will get back, in pounds.
• Tax treatment. Gains on gilts are free of Capital Gains Tax, although the interest is taxable outside a wrapper. Premium Bond prizes are tax free.
• Backing. The UK government has never defaulted on its gilts.

Where bonds are weak

A bond's promise is fixed in pounds. If inflation runs at 5% and your gilt pays 4%, you are guaranteed to lose buying power every year you hold it. Savers saw this vividly in 2022, when long-dated gilts, often sold as the safe part of a portfolio, fell sharply in price as interest rates rose.

Bonds also carry counterparty risk. A gilt depends on the government's promise, and a corporate bond on a company's health. The promise is usually kept, but it is still a promise, not a possession.

What gold does that bonds cannot

• No counterparty. A Britannia in your hand relies on nobody's promise to have value.
• Not fixed in pounds. Gold's price is set globally, so it is not silently eroded in the way a fixed coupon is when inflation rises. Its price moves both ways, and there are periods when it falls, but over long periods it has broadly held its buying power.
• CGT-free without a wrapper. UK legal tender coins such as Britannias and Sovereigns are exempt from Capital Gains Tax with no allowance limits and no paperwork.
• Private and portable. A meaningful sum fits in the palm of your hand.

What bonds do that gold cannot

Be equally honest the other way. Gold pays no income, so it will never fund a monthly outgoing the way a gilt ladder can. Its price can be volatile over short periods, while a short-dated gilt held to maturity barely moves. If you need certainty in pounds on a fixed date, a bond does that job and gold does not.

Why many savers hold both

Bonds defend you against market panic in ordinary times. Gold defends you against the times that are not ordinary: high inflation, currency weakness and loss of confidence in the system itself. 2022 showed that bonds and shares can fall together, which is exactly the moment an asset outside the system earns its place.

Are Premium Bonds better than gold?

They do different jobs. Premium Bonds are a fun, safe home for cash with tax-free prizes, but the average return is modest and your capital is fixed in pounds, so inflation quietly erodes it. Gold carries price risk but is not fixed in pounds. Many households sensibly hold both.

Are gilts safer than gold?

In pounds, over short periods, yes: a short-dated gilt held to maturity has a known outcome. In buying power, over long periods, it depends on inflation, which is precisely the risk gold is usually held against.

Can I hold both in a pension?

Gilts and bond funds sit comfortably inside pensions and ISAs. Physical coins in your hand sit outside them, which is part of their appeal. See our lesson Gold for pensions.

This lesson is general information, not financial or tax advice. The value of gold can go down as well as up, bond prices can fall, and past performance is not a guide to future performance. Tax treatment depends on your circumstances and may change.