Should you invest in gold?
Gold prices have been skyrocketing as of late, which makes many people wonder if they should have gold and other precious metals in their investment portfolio. Adding some precious metals to your portfolio might not be a bad idea as gold and other precious metals can offer portfolio diversification and potentially act as a hedge against inflation. But how do you buy gold and other precious metals for your portfolio?
How to Invest in Gold, Silver, or Precious Medals
If you have considered investing in gold, silver, and other precious metals, you should understand how to invest in these instruments.
Here are some ways you can either directly or indirectly invest in gold, silver, and other precious metals:
- Buy physical gold, silver, or precious metals (you can buy it and store it yourself, or you can buy “stored assets,” which is where a company manages and protects your assets)
- Mutual funds or ETFs that specialize in gold and precious metals
- Gold and precious metals futures
- Stock in a mining company
- Gold or silver coins
Pros and cons of different gold and precious metals investments
There are pros and cons to each of these choices. For example, I would feel comfortable storing a couple of hundred dollars worth of gold or silver at home. But anything beyond that would make me nervous, so I would need to use a safety deposit box to store my precious metals. Having a third-party store and protect the gold would be a much better option for me. Just be sure to do your research if you elect to have a 3rd party store your precious metals to ensure they have adequate security and you can easily cash in your assets if necessary. Tangible assets are less liquid than other ways to invest in gold and other precious metals. Still, they are also the easiest to value because their value is based on the intrinsic value of the metal and usually isn’t based on other factors.
Precious metals stocks and ETFs
Precious metals stocks and ETFs can be a great solution for liquidity because they can be bought and sold on a standard stock exchange. Many precious metals funds and ETFs already represent a diversified selection of precious metals, which makes it easier to buy a diversified group of precious metals without spending a fortune. In my review of Ally Invest, I found options where you can even purchase ETFs for free.
Gold and precious metals futures
Gold and precious metals futures are a risky bet for the average investor and are similar to stock options trading. Buying futures gives you a contract to buy or sell precious metals at a certain price in a particular time frame. You need to understand the gold and precious metals market and feel confident in predicting price increases and decreases to profitably trade precious metals futures.
Mining stocks are often a high-risk, high-reward proposition. Mining stock valuations tend to be more volatile than metal prices and can reflect many factors, including the price of gold, the cost to produce the gold, past results, a healthy dose of speculation regarding future gold prices, and other factors. This probably isn’t a good option for the average investor but could yield good results if you understand the market and are willing to do the research.
Gold coins are a popular investment option and can have value in two ways – the intrinsic value of the gold, and the collectibility of the coin. Sometimes one is more valuable than the other. For example, some gold coins are strictly worth their melt weight, while others almost always exceed their melt value because they are rare and collectible. Some gold and silver coins also have a strong historical value, especially if they were recovered from a shipwreck or other historical incident – a great example of shipwreck gold is from the salvage of Nuestra Señora de Atocha. These coins and ingots are worth far more than their melt weight due to the historical significance of the coins, bars, and jewelry.
Jewelry is another investment option, but I recommend a little research before buying “any old gold chain” and calling it an investment. Most gold you buy at a retail shop is worth equal to or less than its melt weight, meaning it isn’t really an investment. Some jewelry, however, can be a great investment, especially if it is historic or was produced by a famous jeweler. Do your research and understand the market before investing a lot of money in jewelry.
The Tax Implications of Gold Investing
The Internal Revenue Service treats gold as a collectible, just like your antique English tea kettles or vintage vinyl collection.
The money you net selling gold in most forms will be taxed at 28 percent, which is higher than the capital gains rate for other kinds of investments for most investors.
The 28 percent rate applies only to long-term gains in gold. The IRS defines long-term gains as money you earn from selling assets you’ve owned for more than a year.
If you have not owned the gold for more than a year, your gains will be taxed as normal income.
Forms of Gold Taxed at the Collectible Tax Rate
Though trading in gold has been around since antiquity, we moderns have found ways to make owning gold more complex.
Yes, you can still buy physical gold, including bars, coins, and bullion, but there are fewer physical ways to invest in the permanence of gold, and they tend to be more convenient:
- Certificate gold. When you buy gold but have it stored for you in a vault, as with the service offered by TIAA (formerly EverBank), you may never see the metal you own. Instead, you get a certificate representing your investment. This so-called paper gold is also considered collectible and taxed at 28 percent.
- Electronic gold: Companies like Bullion Vault or GoldMoney allow you to buy and sell gold and other precious metals without actually handling the metals. Still, long-term gains will be taxed at 28 percent.
- Gold ETFs: Like stock-based exchange-traded funds (ETFs) gold ETFs allow you to invest in gold shares without owning any actual gold. This is a great way to get started because you can trade gold shares without dealing with the hassle of owning, storing, insuring, securing, and selling precious metals. Long-term gains from gold ETFs will still be taxed at the collectible rate of 28 percent.
What Forms of Gold Gains Dodge the Collectible Tax Rate?
Long-term gains from gold and other precious metals, whether physical ownership, certificate ownership, or tradable shares, should be reported and taxed as a collectible.
So how can you invest in gold but avoid the 28 percent rate on long-term gains?
One way is to invest in gold indirectly by buying stock in a mining company. Since you don’t own any actual gold, your gains would be taxed at normal capital gains rates.
Though buying stocks in a gold mining company wouldn’t mean you owned any actual gold, you’d still be connected to the gold market: Increases in the price of gold could result in more value to your shares.
Be sure to look for a well-managed mining company to reduce the overhead you’d be financing through your stock investment.
More advanced investors may want to look into gold futures. Commodities and futures markets are more volatile and complex than most other investments.
It’s best to work with a broker or financial planner who knows your needs, strategies, and concerns.
But since you’d be investing in future gold transactions and not gold itself, your earnings shouldn’t be subject to the collectible rate.
How Does the IRS Know About Your Gold?
Federal tax law requires you to report your capital gains on your tax return, including long-term gains from your gold, shares of gold, or gold certificate ownership.
If you do not report the gains and the IRS finds out about them through an audit or other sources (a gold dealer’s records, for example), you could face penalties, late fees, and interest charges.
When you sell gold ETF shares or forms of certificate gold, you can bet the IRS will know about your investment.
Even with physical gold sold discreetly, in the long run, it’s easiest, cheapest, and required by law to report your gains or losses accurately and settle up with Uncle Sam at least once a year.
What if I Sell Those Old Gold Earrings?
Should you report the sale to the IRS if you sell some of your gold jewelry, especially pure 24-karat gold?
This is a pretty complicated question. Current tax law does not require dealers to report jewelry sales to the IRS like it requires a report of gold bars or bullion sales.
Some investors like to keep gold in the form of 22- to 24-karat necklaces, rings, or earrings to shield their investments.
A tax professional can help you answer specific questions. Check with a professional in your area before making any significant decisions if you’re concerned about the tax implications of selling your jewelry.
What About Collectible Tax?
Antique dealers and estate auctioneers frequently come across old gold or silver coins with potential value beyond their metallic content.
The IRS will levy capital gains taxes on this kind of gold investment just like it would for other kinds.
However, the market for this kind of investment can be more volatile and dependent on buyer preference. So you might end up paying more than you should.
Suppose you’re using precious metals as a component of your investment strategy. In that case, I recommend just keeping things simple: hold gold because gold has value, not its value to collectors.
Unless, of course, you’re into collecting. In that case, you’ll have a hobby that can strengthen your portfolio.
Taxes Aside, Is Gold a Good Investment?
Most financial and tax advisors I know give this advice fairly often: When you’re investing, you shouldn’t let the IRS make your decisions for you.
In other words, if you’d like to invest in gold and expect to earn capital gains, don’t let the potential for higher taxes scare you away.
Gold has outlasted many other kinds of investments over the past five millennia, and even in our age of interconnected financial systems, gold continues to have value and act as a stabilizing force.
Rather than thinking about all the reasons you should add gold to your portfolio, which are fairly obvious, I find it more helpful to point out the times when you should not buy gold:
Don’t Buy Gold Because of Fear
Many people think of gold as a refuge from modern economic vulnerabilities. For example, the record high price for gold was set in 2011 in the midst of the Great Recession.
The same can happen after political upheaval, either in the United States (think 2016 or 2020 elections) or in other developed or rapidly developing economies.
When things settle down, and the market returns to normal, the price of gold stabilizes, and your investment is immediately worth less than before the market volatility.
Occasionally, you’ll hear about the government confiscating private gold, which can drive up the price. FDR indeed attempted this back in 1933 as the Great Depression raged.
But in modern times, these fears generally have no validity. They do tend to benefit brokers who earn commissions, though.
Don’t Buy Gold Without Considering Extra Costs
Gold has a cost of ownership that can cut into your gains:
- Brokers’ commissions: Unless you find a buyer you know and trust, you’ll need someone to broker a sale. Expect to pay for this service each time you make a transaction.
- Storage fees: Your sock drawer may not be the safest place to keep your gold. Keeping it in storage at a bank would be safer.
- Added security or insurance for self-storage: If you do plan to store gold yourself, you may want to increase your home security and add some extra home insurance for personal property.
- Gold ETF maintenance fees: Like any exchange-traded fund, expect to pay fees to the group managing your gold ETF.
To help keep costs under control, be sure you’re working with a reputable dealer who won’t look for ways to increase his or her profits at your expense.
These costs can cut into your capital gains, especially if you’re investing smaller amounts. The good news is the IRS taxes your net gain and not the gross capital gains.
Avoid Going Into Debt to Buy Gold
Trading in cash or other assets for gold is one thing, but buying gold using borrowed cash can cost you a lot.
People tend to do this when the price of gold goes down. They seem to think it’s the right time to buy and that their temporary shortage of available cash shouldn’t stop them. This is fine if your cash shortage really is temporary, and you can pay off the loans quickly.
More likely, though, the interest you’re paying on your loan will surpass the capital gains you earn, especially after you pay taxes on the earnings.
Be Wary of Advertised Sales
Companies advertising on TV or even making cold calls seem to use fear as a sales technique. They’re also more likely to sell on terms that benefit them.
If you’re new to gold, start with a reputable dealer and stay in control of the process.
How much of your portfolio should be in gold or precious metals?
I’ve read different “expert opinions” on having gold and precious metals in an investment portfolio. Some experts say to leave it out completely, and others recommend moving almost all of your portfolio into gold and other precious metals.
I won’t claim to be an expert, but I think a small amount of gold, silver, and other precious metals can be a decent play for the average investor. However, I wouldn’t invest too much of my portfolio in it. Find a percentage of risk you are willing to take and allocate a percentage of your portfolio to precious metals. Just be sure to include these investments in your asset allocation plan and rebalance your portfolio as necessary.
Also, remember that gold and other precious metals are considered collectibles by the IRS. This is important because gold and collectibles are taxed at a higher rate than long-term capital gains taxes you might find with other investments.
Bottom Line: An Ancient Asset in Modern Times
While taxes shouldn’t dictate your decisions, you should keep the tax implications in mind as you buy, own, and sell gold.
Gold by itself will not result in more income. Its value to you will depend on the market and your decisions about whether to sell your gold or gold shares.
You can go overboard and make gold too central to your portfolio, but most investing gurus will tell you there’s room in your financial life for gold and other precious metals.
Speaking of the experts, be sure to do your research and consult with a knowledgeable investment professional or a tax advisor before making any decisions. I am neither, and this article shouldn’t be construed as advice geared specifically for you.