How not to invest in gold

Buying physical gold has drawbacks, but there are alternatives

Published: May 2014

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Unless you've completely eliminated broadcast media from your life, you've probably seen and heard the ads urging you to buy gold coins and bars. The reasoning varies: Impending inflation is a source of concern, as well as the U.S. budget deficit. Here, we'll set aside the whys of buying gold and concern ourselves with the hows. 

Buying physical gold has a number of disadvantages. The first problem is where to keep it. Segregated storage vaults, where your allotment is tagged and stored separate from others, costs $15 a month. A bank safe-deposit box costs less, but if you want to sell a gold bar that you've stored in one, you'll need to pay to have it re-assayed.

Cashing in gold? Read about what to expect.

Also, when you buy physical gold, you'll pay a premium that can exceed 5 percent of the "spot," or market, price. So if you buy an ounce of gold when the spot price is $1,100, it'll have to reach $1,155 for you to break even, assuming you would be able to sell at the spot price. But the spread is just as wide when you sell, and even wider when selling jewelry. You'll rarely get more than 50 percent of your jewelry's melt value.

Tax disadvantage

Another drawback in buying gold coins and bars is that the Internal Revenue Service considers gold a collectible. So any gain you make on gold or other precious metals will be taxed at a rate as high as 28 percent, which can often be higher than the long-term capital-gains rate.

This doesn't mean you shouldn't buy gold. Commodities such as gold can add diversification and inflation protection to your portfolio. But there are more cost-effective ways of doing that than buying physical gold, namely, through an exchange-traded fund such as SPDR Gold Trust  or iShares COMEX Gold Trust. Those ETFs trade closer to spot pricing and are backed by gold bars stored in vaults in New York and London. Another ETF option is PowerShares DB Precious Metals, which invests in gold and silver futures contracts. It may offer more favorable tax treatment. Finally, holding gold in a tax-advantaged account such as an IRA will avoid many of the tax headaches selling gold can cause.

Editor's Note:

This article also appeared in Consumer Reports Money Adviser.



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