If you think we'll experience more inflation and the dollar is likely to continue to lose value, you might be contemplating investing in gold.
Today’s topic is how to invest in gold.
Two episodes ago, I explained how gold acts as the anti-dollar, meaning that its price tends to go up as the U.S. dollar goes down. Since 2001, the U.S. dollar has been losing value and the price of gold has been going up. It was $270 per troy ounce in early 2001 and is now, in late October 2007, over $780 per troy ounce. If you want to learn more about how gold acts as the anti-dollar, check out the episode from two weeks ago on this topic. You might also want to review last week's episode about the gold standard.
Why Gold Holds Value Over Time
The supply of gold is constrained, which helps gold hold its value. The gold supply increases very, very slowly as more gold is mined. Gold acts as a hedge against inflation and a store of value over time. In ancient Rome, a single one-ounce gold coin could buy a quality toga, a pair of sandals, and a belt. Today, the same is true: a single one-ounce gold coin is about $780, enough to buy a good quality suit, shoes, and a belt. (1)
If you think that we’ll experience more inflation ahead and that the dollar is likely to continue to lose value, you might be contemplating how to put a portion of your portfolio into hard assets, such as gold.
But how does an ordinary person invest in gold?
One of the easiest ways to invest in gold is through an exchange-traded fund, or ETF for short. You can think of an ETF as a mutual fund that you can trade like a stock. I’ll explain more about ETFs and some of their advantages over mutual funds in a future episode.
Two examples of ETFs that simply buy, store, and insure physical gold are StreetTracks Gold Shares (which is traded on the New York Stock Exchange under the ticker symbol GLD) and iShares Comex Gold Trust (which is traded on the American Stock Exchange under the ticker symbol IAU).
One of the key benefits of investing in gold through an ETF is that you don’t have to worry about safely storing physical gold yourself. Owning physical gold can be risky because it can be stolen or lost, and you usually need to pay a fee to store it safely.
One important thing to be aware of is that the IRS taxes gold ETFs like collectibles, not like stocks and mutual funds. Collectibles are subject to special tax rules. If you hold a gold ETF for more than a year, instead of being taxed at the long-term capital gains rate of 15%, you’d be taxed at the special collectibles rate of 28%. However, you can avoid the higher “collectibles” tax rate for a gold ETF by holding it in a Roth IRA, which is tax-free.
Another relatively easy, but indirect way to invest in gold is through a mutual fund or ETF that owns precious metal-related companies. There are many mutual funds that invest in companies around the world that mine gold and other precious metals. Here's a link to a web page that lists top performing precious metal funds.
An ETF that invests in gold-related companies is Market Vectors Gold Miners (which trades on the American Stock Exchange under the symbol GDX). This ETF replicates the AMEX Gold Miners index, which is an index of mostly gold and silver mining companies.
Now, ETFs and mutual funds aren’t the only ways to invest in gold. Some people like to own gold directly and invest in gold coins. If you do buy coins, it’s really important that you do your homework first and buy them from a reputable dealer. You’ll also want to store them safely by keeping them in a safe deposit box, for example. If you have concerns that the government could once again confiscate gold owned by individuals like FDR did back in 1933, you might be most comfortable investing in pre-1933 U.S. gold coins. These coins are considered to be collectibles and, by law, are exempt from confiscation.
Remember to Take It Easy
Lastly, if you are investing in or thinking about investing in gold, it’s important not to go overboard because the price of gold can fluctuate a lot. For those of you who want to see how the price of gold has fluctuated over the years, I’ve posted
So here’s wishing you happy investing and golden returns.
Image courtesy of Shutterstock