One of the hottest investment topics right now is that of gold, and everyone is taking notice. You’ve probably seen commercials encouraging you to purchase gold bars and coins in preparation of what’s to come. Indeed, gold is often touted as a hedge against inflation, as the physical asset’s value is believed to always be more “real” than our fiat dollar. Additionally, concerns of our mounting government debt is like adding fuel to this fire. So, if you look to the future and see inflation (and maybe financial anarchy and the collapse of the U.S. dollar), investing in physical gold may seem like the way to go.
But is it? Being invested in commodity funds is one thing, but investing directly in gold coins and bars may actually cost more than it is worth. Here are some of the reasons why planting a large portion of your investment portfolio in physical gold may not be the way to go:
- Where will you put it? If you buy physical gold, you have to store it someplace. Of course, you can keep it on your premises (hopefully in some sort of secure fire safe), or get a bank safety deposit box. You will have to pay for the bank box, though, and when you go to sell, you are required to have the gold bar re-assayed before the transaction. If you aren’t interested in storing the gold yourself, you can make use of segregated storage vaults, with your gold allotment denoted. This costs around $15 a month, eating into your returns.
- Premium for physical gold: Buying physical gold results in premium that can be 5% — or more — of the spot (market) price. If you buy gold at $1,100 an ounce, that means that, in order for you to break even, you will have to sell it at $1,155. The spread on physical gold can be brutal and difficult to overcome.
- Tax issues: Physical gold is considered a collectible by the IRS. So instead of being subject to the caps on the capital gains tax, gains made from selling gold coins or bars can be taxed at a higher rate, which is up to 28% as of this writing.
Editor’s Note: Actually, all gold investments have the same tax concern. Gold, being a commodity, is taxed as ordinary income even if your profit comes from buying a gold ETF. Either way, you are taxed at your top line income tax bracket.
Between the costs of storage, premiums paid and taxes, you can see how returns from an investment in physical gold can be eroded fairly effectively. It is still possible, though, to invest in gold without having to mess with physically owning it.
Investing in gold without buying bars or coins
Instead of investing in physical gold, you might try investing in funds backed by gold. There are index funds and exchange traded funds that allow you to invest in gold, without having to deal with the issues associated with physical ownership. ETFs like GLD and IAU trade close to spot pricing, and have backing in the form of bars stored in London and New York. You can also invest in ETFs based on gold futures contracts.
While such investments still come with costs, they are often lower than those associated with buying physical gold. And, of course, you pay capital gains taxes on your earnings, which are capped if you keep your investment for more than a year. You can enjoy the inflation hedge, and the comfort of having an investment that is based on a physical resource.
Of course, before deciding to make an investment decision, it is vital to consider your individual portfolio goals, and the type of asset allocation that works for you. Many investors like to have a small portion of their portfolios in gold, but before you make the move, do your own research and perhaps consult with an investment professional.
Editor’s Note: Though funds carry the same tax implications as I noted, buying ETFs are magnitudes more efficient than buying physical gold. No storage or shipping concerns are two factors, but most important to me is liquidity. With an ETF investment, I can sell if I want, when I want but with a gold bar, good luck finding a buyer quickly.
Seeing something shining and yellow may psychologically be more comforting, but you might be better off with gold wallpaper instead.
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