Gold Versus: Premium Bonds

Welcome to our new series, Gold Versus.

As the name suggests, we’ll be comparing gold with other popular assets, savings and investment choices, looking at their pros and cons, how they differ from gold, whether they can even be meaningfully compared, and what those differences reveal about value and security.

The intention of this series isn’t about telling you what you should buy, sell or keep. It’s just about sharing observations and facts, and exploring how different assets behave in different conditions.

Why compare gold and Premium Bonds?

Premium Bonds can sometimes be compared to gold because both are seen as ‘safe’ ‘low risk’ options when times get turbulent. Both appeal to those who want to protect what they already have rather than chase high-risk returns.

Premium Bonds offer government backing and the chance of winning a prize. Gold offers independence from financial systems and a store of value.

What are Premium Bonds

Premium Bonds are a savings product issued by the UK government through National Savings and Investments (NS&I). They are not the same as a normal savings account – instead of earning interest, each bond number is entered into a monthly prize draw, with winners receiving tax-free prizes.

Every £1 invested buys one bond number. Each month, those numbers are randomly selected for prizes ranging from small amounts up to a headline £1 million jackpot. If a bond does not win, it earns nothing, but the original money remains untouched. There are tens of billions of eligible bond numbers in each draw, with odds of winning set at around 24,000 to 1 per bond.

That’s the main trade off; there is no guaranteed return, but there is always the chance of a prize.

A major part of their appeal is security. Premium Bonds are backed by HM Treasury, which means your money is protected by the UK government rather than a bank. For many people, that’s a big reassurance, particularly during periods of economic uncertainty or market volatility.

Each individual can own up to £50,000 in Premium Bonds. They can be bought and cashed in at any time, although new bonds must be held for a short period before they become eligible for the prize draw. When money is withdrawn, it is usually paid back into your account within a few working days. Any prizes won are tax-free, which adds to their popularity, especially among higher-rate taxpayers.

Premium Bonds appeal to cautious savers as they offer somewhere to keep money safe without locking it away for years, yet more engaging than a standard savings account. For many households, Premium Bonds sit alongside bank accounts and ISAs.

A brief history of Premium Bonds

NS&I’s roots stretch back to 1861, when the government first set up a national savings scheme to help ordinary people put money aside while also funding public spending.

Premium Bonds however, were launched in 1956 after the Second World War, with the aim of encouraging people to save again after a long period of hardship, while simultaneously giving the government a low-cost way to borrow money.

They proved instantly popular, and on the first day alone, millions of pounds’ worth of bonds were bought. Over time, Premium Bonds became woven into British culture, often given as gifts for children or used as a first step into saving.

A key part of their story is ERNIE – the Electronic Random Number Indicator Equipment. First introduced in the 1950s and famously built using technology linked to wartime codebreaking, ERNIE was designed to ensure every bond number had an equal chance of winning. Today, the latest version uses quantum technology!

Premium Bonds have evolved since they first launched – the maximum investment was just £500 and the top prize was £1,000 (a significant sum at a time when average weekly wages were around £10). Yet their core idea has stayed the same – no risk to your capital and the chance of winning a prize.

What is gold as an asset?

As we all know gold can be held physically, in bars, coins and jewellery, or digitally through modern platforms which represent ownership of real gold – such as gold ETFs. Gold is not interest earning nor does it generate income. Its value comes from price movement and global demand. 

Gold is very much seen as a store of value and has tended to attract attention during periods of inflation, economic stress and uncertainty.

Comparing gold and Premium Bonds on risk and security

Premium Bonds carry very little risk to the original amount you put in, but there is no guaranteed return, and many holders will never win a prize. Over time, inflation can also reduce the real value of money held in Premium Bonds, because capital does not grow unless a prize is won. In that sense, you’re not at risk of losing money outright, but of spending power.

Gold comes with a different set of risks. Its price can rise and fall, sometimes sharply, depending on global events, interest rates and investor sentiment. Anyone buying gold has to accept that its value may drop. There’s also practical risk around storage, security particularly with physical gold.

Comparing gold and Premium Bonds on returns

Let’s look at an examples:

Take two Premium Bond holders with the same £20,000. One might win £25 three times in a year. The other might win nothing at all. It depends entirely on the draw that month, not on how the economy is performing. Over several years, many holders see long gaps with no prizes, while a small number see regular wins. 

With gold however, everyone holding it experiences the same price movement.

For example, if a person bought gold in 1999 they would have bought it at around $275 an ounce. If they held on to it until 2011, it would have risen above $1,900 an ounce. Anyone who held gold across that period would see the same value rise with the market, regardless of who they were or when they bought their first bar or coin.

But then there are also the quieter periods – such as between 2012 and 2018 – when prices were much more static meaning holders saw little change either way. 

The effect of inflation on Premium Bonds vs. gold

With Premium Bonds, the amount you hold does not grow unless you win a prize. If inflation rises and you do not win, the real value of your money falls. Even when prizes are won, returns may not keep pace with high inflation because there is no built-in growth linked to price increases.

Gold’s price tends to rise when inflation increases and confidence in currencies weakens. This is why gold is commonly described as an inflation hedge.

Premium Bonds tend to struggle most when inflation is high, because capital stays flat while living costs rise. 

Gold struggles during long periods of low inflation and economic stability, when interest-bearing savings and other assets become more attractive.

Which is more liquid, gold or Premium Bonds?

With Premium Bonds you can withdraw your money at any time and it is usually paid back within a few working days. You simply cash them in and receive the same amount you put in, minus any prizes you may or may not have won. There is no need to find a buyer or worry about market prices at the point of withdrawal. 

Gold is also relatively liquid, but without stating the obvious, you do have to find a buyer and sell it to them. And there are practical steps which come with selling physical gold – valuations, verification and settlement. Digital gold can often be sold more quickly through an online platform. Either way, access depends on market conditions rather than a fixed redemption process. That means its price is dependent on the market price and so does where and how it is sold.

Tax considerations between Premium Bonds and gold

One of the great things about Premium Bond prizes is that they are tax-free! Winnings do not need to be declared as income and they don’t count toward income tax or capital gains tax. 

This is of particular interest for people who already pay higher rates of tax on savings interest.

If you sell your gold for more than you paid for it, the gain may be subject to Capital Gains Tax (CGT). This applies to most forms of investment gold and bullion, depending on how it is held and sold. In the UK, CGT rules are set by HM Revenue and Customs (HMRC) and depend on your total gains in a tax year. Tax only becomes relevant at the point of sale. If the increase in value stays within the annual CGT allowance, no tax is due. If it exceeds that threshold, CGT may apply to the amount above it.

How Premium Bonds and gold can sit side by side

If you’re weighing up Premium Bonds against gold, it helps to start with a simple question: what do you actually want this money to do?

Premium Bonds are usually about saving steadily. They feel close to cash. You know the money is there, you can get to it easily (and there’s the small excitement of a potential prize).

People treat gold as something which holds value when inflation rises or when the world feels unpredictable. They don’t turn to it for monthly income or quick access. 

When you look at them like that, it’s less about which one is “better” and more about what job each one is doing.

When all your money is tied up in one place, you are betting on one outcome. If that asset performs badly or conditions change, there is nothing else to balance it out. And history has a habit of showing us that calm periods do not last forever.

For many people, Premium Bonds and gold are not competing choices at all, they are complementary. 

This article is for general information only and does not constitute financial or investment advice. Individual circumstances vary, and readers should seek independent professional financial advice before making any financial decisions.

Learn more about investing in gold: goldbank.co.uk