Investing in Physical Gold Can Cost You

by Miranda Marquit · 21 comments

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:

  1. 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.
  2. 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.
  3. 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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{ 21 comments… read them below or add one }

Josh March 2, 2010 at 9:25 am

My family invested in a bunch of gold bars decades ago, and they are heavy but the bank has it. We are paying money every year to put it in a huge safety deposit box. Definitely not worth it if you ask me.

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D. Patel January 23, 2011 at 4:17 pm

Josh,

Apperantly, you and family wish you had invested in gold.

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Robert March 2, 2010 at 9:34 am

Invest in other currencies before you invest in gold. It’s pricey to keep stored away and pretty much kills any profit you make from the investment.

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Chris March 2, 2010 at 11:28 am

If you invest in shares of a gold mining company you have the advantages of investing in gold, when it comes time to sell, profit from your shares WILL be treated to the more favorable Capital Gains Tax Rates.

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MoneyNing March 2, 2010 at 5:49 pm

Great idea Chris, though people who follow this advice need to be aware that the company itself carries additional risk.

Therefore, buying a mining company’s stock is not a pure investment of gold.

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WR March 2, 2010 at 2:43 pm

Gold is an excellent investment…in good times. Times right now folks don’t fall under the ‘good’ umbrella. When we fully recover from this recession, and we will, Gold will drop to a point where it makes sense to invest in it again.

Protip: Buy gold when the economy is booming and prices are low. Sell gold when the economy tanks (like now.). Recessions are cyclical. We will fully recover from this one and have another one in a few years.

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MoneyNing March 2, 2010 at 5:50 pm

I agree. Basically, when everyone is talking about an investment, it’s usually not the best time to buy it :)

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Monevator March 2, 2010 at 2:43 pm

As soon as you take receipt of physical gold it starts to lose value, because if you go to sell it someone is going to have to assay it again to check it’s of the purity you’re claiming.

On the other hand, in the meltdown scenario your ETF isn’t going to be so much use. :) So a mix is best if you’re keen on gold (plus Chris’s gold stocks).

I’m not right now, FWIW.

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Shaun McGowan March 2, 2010 at 3:43 pm

Investing in gold is a good idea but there are some problems associatied with buying physical gold. 1. Problem of storage. Either it will be costly e.g. bank locker or it will be risky e.g. keeping under pillow 2. There will be some deduction in the weight at the time of selling. 3. There is less less liquid. You need to go to shop to sell this gold. All these problem is not there in gold ETF (Exchange Traded Fund). Have a look in this fund before investing.

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Stan March 2, 2010 at 6:29 pm

I personally think gold is in the bubble state at this point. Yes, there are inflation risks due to the absurdly low rates set by the Fed. However, as soon as the economy starts picking up and there is any risk of inflation, the Fed will begin to raise rates, causing the dollar to appreciate and gold to depreciate relative to the dollar. Also, there is just too much hype on gold right now with everyone and their moms buying gold. In my opinion, the risk of gold falling from this point is higher than gold appreciating from this on, especially in terms of the U.S. dollar.

The better investment opportunity at this point may be in currencies. With all this debt floating around (e.g. Greece), all these “bailouts” can’t go on forever. Whether debt is passed around from one area to another in one country (bailing out big banks with tax payers’ money in the U.S.) or one country to another (Germany attemping to bail out Greece), the debt is still there. It will eventually come out in one form or another, most likely in currency markets.

Watch out for big swings in Euro, Dollar, and the Pound in the coming months…

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Alcoholic Millionaire March 2, 2010 at 11:10 pm

a great time to buy gold would have been 5-10 years ago. Now that everybody is talking about gold as an investment it’s time to get out if you own it. I’ve heard stories of gold being sold in vending machines in $20 increments. When you hear things like that and see infomercials all night long about investing in gold it’s time to find a less favorable investment.

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Meow Mix 5000 March 3, 2010 at 6:56 am

Resident gold bug jumping in to correct some misconceptions…

1. Storing gold can be done safely, without a monthly bank vault (geez)… If you are worried, there are about half a dozen reputable vaults throughout the world (that I know of) that store your metals indefinitely with a reasonable 1 time fee.

2. Premiums and liquidity: I’ve bought all my gold/silver on ebay BELOW spot. Rare, but happens… I can find numerous local buyers and dealers that bid ABOVE spot with relative ease… If I was selling, I could make a profit the day after I received it.

3. Tax issues are being overblown… How often to you people really fill out tax forms for relatively small private sales, between two citizens?

4. Invest in currencies first? gold “bubble”?… When I was buying gold at (new decade highs) $450 I heard all the same arguments. Funny how all you “buy and hold” investment types are so insistent of a “bubble” when you also say market timing is impossible… If it’s a bubble, then short it. -don’t, it would be insanely stupid.

5. Gold is fundamentally attractive and essentially a must for diversification in this environment.

When distrust is high, when the money supply is being screwed with, when equities are inflated, when interest rates are in the toilet -these are all times to own gold… Sell out of your gold when you get an attractive entry into equities or interest rates become decent… The Dow:Gold ratio is still ~10:1… the last two “crisis” times it went near 1:1.

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Meow Mix 5000 March 3, 2010 at 7:09 am

Just to clarify: I agree most gold ownership is best done through investment houses… However, some precious metals in physical possession would have been very handy during some financial, monetary and political crises.

About 8%-30%, depending on your outlook, is a reasonable percent of your metals to have physical access to.

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Ted @broketofree March 3, 2010 at 12:56 pm

I wish I had gold- to sell right now. Seems like a good time to sell.

I always think of buying gold as a fear investment. Somehow the dollar will disappear or devalue to wheelbarrow levels. Why not invest in a local business? Get guaranteed returns on safer investments? Take risks some other way. Saying that something physical like Gold is a safe investment seems a bit nutty to me.

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Cd Phi March 3, 2010 at 12:59 pm

This is interesting. I didn’t know there were all these aspects to investing in physical gold. I was considering it but now I may have to reconsider with the option of still investing in gold just not physically, like index funds.

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Michael Cohen March 4, 2010 at 9:50 pm

EACH AUSTRALIAN SITTING ON A $500 GOLD MINE
Aussies urged to check their jewelry boxes for new ‘stimulus package’

Since gold has hit new record highs this year, Australia’s leading buyer of gold The Gold Company has rewarded its customers, on average, a massive $544.80 each for their unwanted gold items. A review of the last thousand customers has shown this to be the average dollar value taken home.
Spurred on by the tougher economic times and record gold prices, The Gold Company has experienced a gold rush with people keen to make money off items that would have otherwise stayed stashed away in their jewelry boxes, underwear drawers or bedside tables.
For most, the value of their unwanted items comes as a complete surprise as the jewellery has spent most of its time collecting dust in boxes, “I have lost count at the number of times people have walked in here expecting to earn enough for a couple of CDs and instead walk away with enough for a brand new stereo,” says Roy Cohen, precious metal expert from The Gold Company.
“The term ‘worth its weight in gold’ exists for a reason. It’s valuable and people now understand they can make a significant amount by simply visiting our offices in Sydney’s CBD or requesting a GoldPak online. It’s so much easier, more profitable and safer than selling the items elsewhere.
“An elderly couple recently brought in some unwanted jewellry. The highest offer they had was $3000. The gold company paid $5400 for the parcel. Needless to say they were more than happy.”

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mbhunter March 5, 2010 at 7:39 pm

There are reasons for owning physical gold. There are reasons for owning other vehicles that track gold but aren’t physical gold. One size doesn’t fit all, but sometimes it is a good idea to own the yellow stuff. If you don’t have it in your hot little hand, you don’t really own it.

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trey August 14, 2010 at 6:20 pm

yes recessions are cyclical and yes i always advise to buy low and sell high. Most say now is the time to sell gold when in reality that’s dead wrong. Just like the subprime housing bubble “burst” so to will the dollar bubble. At that point Gold will SKYROCKET

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Jim August 29, 2010 at 6:27 pm

If we keep printing fiat money, gold will be the only thing worth anything. The world knows something is wrong with the economy and is shoring up their investments. The economy could tank and then your paper money would be worth just that, the paper it is printed on.

It might be a wise idea to invest in a small amount of gold to guard against such a scenario.

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Michael November 11, 2010 at 6:40 pm

I decided to invest in physical gold this year. Thought about the ETF’s, yet I came to the personal conclusion that having possession of my assetts in hand was the way to go. I bought from a couple different companies… APMEX and also PMBG, Precious Metals Brokerage Group. Both companies have excellent websites with live maket spot pricing on gold & silver. PMBG has contacted me a couple of times and sent me emails on the latest information from the market which I love. These guys are like investment bankers, the kind I like to work with. The PMBG team also knew their gold coin products very well.

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WR July 22, 2011 at 8:29 pm

it is nice to rekindle this discussion.

Gold now is $1600 per ounce. This is a direct result of the uncertainty surrounding the debt ceiling debate.

1 of 2 things will likely occur:
1. debt talks are resolved. disaster averted. economy slowly recovers. Gold price drops
2. Economic Armageddon. Interest rate soar. Great Depression 2.0. Gold prices soar. U.S Dollar becomes increasingly worthless.

If you have physical gold in your portfolio you can sell when the price is high or hold when the price drops.

either way, you should have physical gold in your holdings to buffer against the insane machinations of our economic/political system.

-WR

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