As investors notice gold’s impressive surge in recent years, the pivotal question shifts from whether to invest to how to do so effectively. The decision between physical gold and gold-backed securities, such as ETFs, brings with it significant questions concerning liquidity, expenses, security, and other practical aspects.
Typically, gold exchange-traded funds (ETFs) provide tax benefits, enhanced liquidity, and reduced costs over the long haul when compared to acquiring physical gold.
If you are considering investing in gold, you may consider gold stocks, gold ETFs, physical gold, futures, options or Gold IRAs. Here we’ll explore your alternatives for physical gold and gold ETFs, helping you decide which path, if any, aligns best with your investment strategy.
Owning Physical Gold
The primary method for investing in physical gold is by acquiring gold bullion. Gold bullion consists of investment-grade gold, typically available as bars, ingots, rounds, or coins. This type of gold is always a minimum of 99.5 percent pure, and gold bars will feature the producer’s name, weight, and purity inscribed on them. Unlike gold coins, silver bars, ingots, and rounds do not carry numismatic value; their assessment relies solely on their silver content.
Coins produced by government mints carry a face value. Additionally, coins can possess collectible worth related to their rarity, providing some protection against drops in gold’s spot price, but this can also result in a significant premium above the current metal prices.
Those looking to purchase physical gold can explore options like online bullion merchants, pawn shops, select banks, and private individuals. Look for reputable, well-established dealers.
What To Consider Before Investing In Physical Gold
Here are few important things to consider if you don’t own any gold right now but are thinking of making the move:
- Compare price tags: Prices for gold might differ from dealer to dealer. Compare prices, considering markups or premiums above the spot price of gold.
- Verify authenticity: Make sure the gold you’re purchasing is legitimate.
- Storage and insurance: If you prefer not to keep gold at home, you’ll need to find a third party, such as a bank or a specialized storage facility. However, if you choose to store it at your residence, investing in a high-quality safe is advisable, and obtaining insurance may also be a wise choice.
For those interested in a gold individual retirement account (IRA), the Internal Revenue Service mandates that you store your gold with an approved government depository. Goldco is a trusted company that could help you with this process.
- Choose allocated or unallocated accounts. Investors can choose to hold gold in either allocated or unallocated accounts at banks and other depositories.
Allocated gold belongs entirely to the investor, with the depository simply acting as a secure storage facility. When you deposit a gold bar in an allocated account, you receive the exact same bar when you withdraw it.
Unallocated gold accounts, on the other hand, do not involve ownership of physical gold. Instead, purchasing gold in these accounts is just like making a deposit. The financial institution can use it for lending purposes, similar to cash deposits. While unallocated accounts are less expensive, they are not insured by the Federal Deposit Insurance Corporation (FDIC).
- Gold and Its Inverse Relationship to the Dollar. One of the primary factors influencing the price of gold is the U.S. dollar. Since gold is predominantly traded in dollars, a stronger dollar can lead to a decline in gold prices. Conversely, a weaker dollar often boosts gold prices. Additionally, with a finite supply of gold and predictable annual mining, the metal is considered as a reliable hedge against inflation.
- Physical gold taxation. The IRS classifies physical gold as a collectible. According to these regulations, profits from collectibles sold within a year are taxed as ordinary income. However, if you keep the gold for over a year, taxes can reach up to 28%, exceeding the highest long-term capital gains tax rate of 20%. These regulations similarly apply to gold-backed ETFs that are set up as trusts, like GLD.
Investing In Gold ETFs
Gold exchange-traded funds (ETFs) are commodities funds that mimic stock prices and have gained a lot of popularity as investment vehicles. Despite being composed of gold-backed assets, investors do not truly possess the actual commodity. A Gold Exchange-Traded Fund (ETF) is a type of mutual fund that allows a group of investors to collectively own gold bullion with a purity of 99.5%. These funds typically track domestic gold prices, offering a cost-effective alternative to owning physical gold and avoiding the challenges of storage and security.
ETF shares can be purchased through a brokerage firm or a fund manager. Gold ETFs work by pooling money from investors and using it to purchase gold. Profits are shared equally among participants. By investing in gold through an ETF, you can gain exposure to gold without needing significant capital, as ownership is shared. The managing firm handles storage and security.
Ownership of investors in gold ETFs is classified as ownership in collectibles under Internal Revenue Service (IRS) guidelines. As a result, holding gold ETFs for one year or longer incurs a relatively elevated capital gains tax. The highest rate for long-term investments in commodities is 28%. In contrast to the 15% rate that typically applies to most other types of long-term capital gains.
Selling before the one-year mark to evade the tax not only limits the investor’s potential profits from prolonged gains in gold but also subjects them to ordinary income tax.
What To Consider Before Investing In Gold ETFs
Compared to purchasing gold directly, investing in gold exchange-traded funds (ETFs) is much simpler. Here are few main points to consider:
- Open a brokerage account: Create an account with a trustworthy online broker if you don’t already have one.
- Research different gold ETFs: Compare their asset management, trading volume, and expense ratios.
- Maintenance: The fund takes care of everything on your behalf. Make sure you are aware of annual fees and commissions.
Final Words
Experts recommend allocating around 5% of your portfolio to commodities, as they can help diversify your investments and act as a hedge against inflation. This is especially true for gold, which often behaves differently from stocks, bonds, and currencies. However, given gold’s notorious volatility, you may want to keep your gold holdings below the 5% threshold if you’re already investing in other commodities.
It’s also important to view gold as a way to preserve wealth rather than a means to generate significant profits—unless you’re a day trader with a high-risk tolerance.
