Investment in Physical Gold?

Gold seems to be all the rage these days — especially physical gold. Whether you are investing in gold coins, or whether you are investing in gold account, receiving a record of numbered gold bars that belong to you, it’s important to understand the challenges that can come with investing in physical gold.

While physical gold can be a way to diversify, and it can provide you with a solid, tangible asset that might be able to help you when times get tough (or if you believe it’s only a matter of time before the U.S. dollar is completely worthless), it’s important to think through your decision. As with any investment, it’s important to consider the drawbacks associated with investing in physical gold:

Where Will You Keep It?

If you invest in physical gold, you have to figure out where you are going to keep it. Do you have a big fire safe at home where you can stash your collection of gold coins? Perhaps you are keeping your gold in a safety deposit box at the bank. In either case, your gold is vulnerable to theft.

Of course, you might not have the means to store the gold yourself. Some people prefer to use pooled accounts to help them store their physical gold. Your gold is in a vault, either numbered by bar or coin specifically to you, or you have a record of a sum of gold (unallocated) assigned to you. In the case of an allocated account, you usually have to pay a storage fee and an insurance fee. With an unallocated account you don’t have to pay as many fees, but the gold might remain in the name of the company; you are at risk if the company goes out of business and creditors get the gold.

When you store gold on-site, you have quick access to it, but it might be more vulnerable to disaster and theft. Store it off-site, though, and you might not get access to it when you want it.

Premiums and Taxes

Another issue with physical gold is that you have to consider the premiums and taxes. Usually, you pay a premium when you buy physical gold, meaning it is marked up from the market price. Premiums are usually less with pooled accounts, but they are there nonetheless. This means that if the gold loses in value (perhaps it is a bubble that will burst), you not only see costs in terms of losses, but the premium you paid to buy physical gold increases your losses.

Realize, too, that gold is taxed as a collectible by the IRS. Right now, that means that you pay a 28% capital gains tax if you decide to sell your gold for a profit. If you purchase gold stocks, though, you pay the “regular” capital gains rate; you don’t have to pay the collectible rate (although you do if you invest in a gold ETF).

Alternative: Gold Jewelry

You can avoid many problems associated with investing in physical gold with the help of jewelry. Gold jewelry is not considered a collectible, and sales of your “heirloom” pieces don’t have to be reported for income tax purposes. Jewelry is portable, and easy to store (although theft can still be a worry).

For some, the financial security of gold as a tangible asset, and something of “objective” worth, outweighs the costs now. And, really, it depends on your goals and motivations. But, before you purchase physical gold, make sure you understand what you are about to do.