Gold may be set to glitter again, according to many “gold bugs.” These gold enthusiasts say the best time to buy is when inflation threatens to soar, which may happen as a result of President Donald Trump’s plans to ratchet up government spending and cut taxes. They also say that gold’s recent price below $1,130 an ounce, compared with its all-time high of nearly $1,900 in 2011, makes it a bargain now. Gold doubters, however, say that the strengthening US dollar and improving US economy make gold unattractive.
Whether you decide that now is a time to invest in gold or you hold off for a while, how you buy gold can be almost as important as when you buy. It’s available in a variety of forms including gold coins and bars…funds that own physical gold…and gold-mining companies. Each offers certain advantages and disadvantages. To help you decide, Bottom Line Personal interviewed two leading gold experts—gold bullion dealer Barry Stuppler, who discusses investing in physical gold, and precious-metals mutual fund manager Frank E. Holmes, who discusses investing in various forms of “paper” gold…
INVESTING IN PHYSICAL GOLD
Physical gold is available for investment as coins and bars.
Pros of physical gold: You can keep a close eye on your gold in a home safe or a safe-deposit box, and your gains and losses are directly tied to gold prices rather than to other factors that can influence the success of gold-mining companies, such as management or geopolitics.
Cons: It takes extra work to store and insure gold yourself. It’s more expensive and difficult to buy and sell than gold-related stocks or exchange-traded funds (ETFs). And it pays no dividends.
Here are the key strategies…
Buy one-ounce American Buffalo coins made by the US Mint and/or Canadian Maple Leaf coins made by the Royal Canadian Mint. These are among the most widely circulated gold coins…and among the easiest to buy and sell…and both are 99.99% pure gold. There are many other types of gold coins available and gold bars in weights typically ranging from one ounce up to 400 ounces. But the market for any of these is not as large or as liquid, and the fees you pay to buy or sell might be higher.
To avoid scams, buy coins from dealers who are members of the Professional Numismatists Guild’s Accredited Precious Metals Dealer program. Although government mints offer special-edition “collectible” gold coins directly as keepsakes and gifts, the markups over the market price of gold are so high that these coins don’t make sense as investments. For example, you can buy a “Lady Bird” Johnson 2015 First Spouse Series One-Half Ounce Gold Proof Coin from the US Mint for $790, about 40% higher than recent gold prices. To buy investment-grade gold, you need to go through a dealer. Transactions with dealers typically are conducted over the phone or via e-mail. Once you agree on a price, you wire the money to a dealer (credit cards are not accepted). Your gold is sent by overnight mail and insured for full value. These dealers will buy your gold back from you as well. For a list of about 20 top dealers, go to APMDDealers.org/apmd-dealers.
Pay no more than a 5%-to-6% premium to the current price of gold…and accept no more than a 1%-to-2% discount to the current price when you sell. These prices reflect the fees that dealers charge. You can check gold prices at GoldPrice.org.
Skip gold jewelry as an investment. It doesn’t reliably track the price of gold, and factors such as the appeal of its design and personal tastes can inflate the price far above the value of the actual gold.
Store your gold in a safe-deposit box at a local bank. Even though home safes are convenient, they might be tempting targets for thieves. Figure on paying $50 annually for a safe-deposit box plus insurance premiums of $25 annually for every $5,000 worth of coverage, which you often can get through the company that provides your homeowner’s insurance.
Be aware of IRS restrictions if you want to keep gold in an IRA or a 401(k). You’re allowed to invest only in gold bars or certain gold coins, which you are not allowed to store in your own home or a safe-deposit box. For more information, go to IRS.gov and search for Publication 590-A and the section called “Investment in Collectibles.” Note that even though federal law allows it, most brokerages don’t allow customers to keep physical gold in their IRAs. Among the exceptions is Fidelity Investments, which allows you to buy gold coins and/or bars for your IRA if you do so from Fidelity. For details, go to Fidelity.com/trading/investment-choices/gold-silver-platinum.
Tax treatment: Gold in taxable accounts is considered a “collectible,” meaning that when it is sold, long-term capital gains are taxed at a special 28% rate (or your tax bracket, if less) rather than at the 0%, 15% or 20% rate that applies to stocks.
INVESTING IN “PAPER” GOLD
If you don’t want to own physical gold, you can gain exposure through a variety of securities such as stocks and ETFs…
Gold ETFs. These funds issue shares that represent actual gold owned by the funds. The gold is stored in bank vaults in major cities and is regularly audited.
Pros of gold ETFs: The fund shares are simple and inexpensive to buy and sell through most brokerages in both taxable and retirement accounts. The ETFs track the price of gold closely while sparing you the expense and hassle of storing gold.
Cons: Since you don’t own physical gold that you can handle and oversee yourself, you may not get the same sense of security that having physical custody of your asset gives you. And the ETFs pay no dividends.
Recommended: iShares Gold Trust (IAU) has an annual expense ratio of 0.25%—lower than the 0.4% for the much larger SPDR Gold Shares ETF. Both ETFs reliably track the price of gold.
Tax treatment: Gold ETF shares are considered “collectibles” just like gold coins and subject to the same long- and short-term capital gains tax rates.
Gold-miner ETFs. These ETFs, which own stocks of various gold-mining companies, have greater potential for big gains and big losses than physical gold or ETFs that invest in gold. Reasons: Once the fixed costs of mining are covered, even a small move in gold prices can sharply increase or reduce a gold-mining company’s profits. Also, the stock prices are sensitive to other company-specific factors ranging from a new gold-mine discovery to management mistakes to the political situations in countries where gold mines may be located.
Pros of gold-miner ETFs: These funds provide greater diversification than investing in a single gold-mining company, and they pay cash dividends.
Con: They are much more volatile than physical gold or ETFs that invest in physical gold.
Recommended: VanEck Vectors Gold Miners ETF (GDX) is the largest and most liquid ETF in its category, holding about 50 large-cap stocks including the top gold miners in the world, Barrick Gold and Newmont Mining. Recent yield: 0.56%.
Tax treatment: Unlike physical gold or shares of physical-gold ETFs, these funds are subject to the same short- and long-term capital gains taxes as ordinary stocks.
Stock of gold “royalty” companies. These companies don’t mine gold themselves. Instead, they provide capital to gold-mining companies in exchange for a percentage of future sales as royalties.
Pros of gold-royalty companies: They don’t have to deal with the huge operating expenses and other liabilities involved in actual gold mining. They pay a cash dividend to shareholders, and their shares tend to be less volatile than gold-mining stocks and gold-mining ETF shares.
Con: You’re betting on management’s prowess in identifying the most cost-effective gold-producing mines around the world.
Recommended: Franco-Nevada Mining (FNV), one of the oldest royalty companies, has 340 royalty-paying assets in places ranging from Australia and South Africa to the Yukon. Recent yield: 1.5%.
Tax treatment: Same as ordinary stocks.