Is all that glitters gold?
If you’ve turned on the TV or radio lately, there’s a good chance you’ve been flooded with ads urging you to buy gold now.
These commercials tout gold as a stable investment in a world gone haywire. While that promise of safety may sound tempting, be aware that the precious metal doesn’t hold the same allure for all investors.
Here are some things to keep in mind if you’re considering gold as an investment:
It’s an insurance policy. Typically, an investment in gold is seen as a way to protect against financial, political or economic upheaval. As a commodity, it’s also considered a hedge against inflation. The more uncertainty in the world, the better gold is expected to perform.
It’s a taxing proposition. In the United States, gold is generally taxed as a collectible. That means it can carry a burdensome 28 percent long-term capital gains rate. The same collectible rate even applies to exchange-traded funds (ETFs), which are by no means very collectible (unless you want to frame your brokerage statement).
An ETF can make it easy. Even if it’s not romantic or advantageous in terms of tax treatment, a gold ETF can be a convenient and cost-effective way to invest in gold. There are a number of gold ETFs that track the price of gold with no storage cost and relatively low ongoing expenses. Typically, the share price is equivalent to the price of one tenth or one hundredth of an ounce of the underlying shiny stuff. If you decide to go this route, review the annual operating expenses associated with the ETF you choose. Typically, they should run less than half a percent. Your performance should reflect the movement of the price of gold, less those expenses. This is obviously a liquid approach to gold ownership, as you can sell quickly by calling your broker or executing the transaction online. However, if you’re hoarding for a full-scale global catastrophe, it’s probably not an attractive option since individual investors generally can’t turn shares into gold bars or coins.
An IRA has tax advantages. By owning gold or a gold ETF in an IRA, you can eliminate some of the precious metal’s tax drawbacks. However, this approach comes with its own unique challenge if you want the physical commodity: you will need to find a custodian to hold the gold. Investments in an IRA, even physical gold, cannot be stored in your safe-deposit box or under your mattress. They must be held by a qualified custodian, which will require you to pay for storage and deal with taxes as you normally would for an IRA.
Other factors can affect gold-based mutual funds. Some mutual funds invest in gold as well as other precious metals – and they may also invest in companies that mine or process those metals. While the performance of such funds generally tracks the commodity price, other factors – including production costs, borrowing costs, management efficiencies and business failures – can also affect prices and performance.
Gold is not an income producer. Even in today’s low-interest environment, many investors look to their portfolio for income. If that’s what you seek, gold won’t help the cause. Your return will be based on the price of gold moving up or down.
There may be a place for gold in a well-diversified portfolio, but it’s probably not a big place. Everyone’s situation is different and incorporating this volatile investment in your portfolio is not a move to make without careful consideration. So before you buy, talk to your tax and investment advisers to make sure gold fits your goals.
J.J. Montanaro is a certified financial planner with USAA, The American Legion’s preferred provider of financial services. Submit questions for him online. www.legion.org/usaa/focusonfinances