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 a gold account and 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 can provide you with a solid, tangible asset that might be able to help 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’re going to keep it. Do you have a big safe at home where you can stash your collection of gold coins? Perhaps you are keeping your gold in a safe 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, and you have either a numbered bar or coin specifically yours (allocated), 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, putting you at risk if the company goes out of business and creditors get the gold.
When you store gold onsite, you have quick access to it, but it might be more vulnerable to disaster and theft. Store it offsite though, and you might not get access to it when you want it.
What Will You Use It For?
Many people consider gold “pure money.” After all, it’s been used as a medium of exchange for thousands of years. As a result, it’s tempting to purchase physical gold in an effort to protect yourself against economic collapse.
But if there is an economic collapse, who is going to accept your gold as money? If the system breaks down, gold isn’t going to be useful as barter items. You can’t eat gold or use it for clothing or shelter. Who will want to accept your gold and part with survival items? In such situations, gold just isn’t as valuable as you might think.
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 still there. This means if the gold loses its value (perhaps it is a bubble that will burst), you not only see that loss, but the premium you paid when buying it will increase your losses.
Realize too, gold is taxed as a collectible by the IRS. Right now, that means 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.