We like to think of gold as the ultimate in “true” value. After all, gold is versatile. It is seen as “pure money” while at the same time being a metal used in industrial processes. From jewelry to collectors coins to bullion, investing in physical gold is something that many people are interested in.
I'm not overly fond of investing in physical gold myself, but I can see the appeal. Even in a situation of economic collapse, gold would be valuable in any physical form. On top of that, owning gold can be seen as a hedge against the declining value of the dollar.
Before you invest in physical gold, though, it's important to understand some of the logistics associated with it, and acknowledge some of the realities of investing in physical gold:
1. Physical Gold is Taxed as a Collectible
When you invest in physical gold, it's taxed as a collectible. This includes investments in gold coins and bullion, as well as investments in gold ETFs. While you can invest in gold stocks and receive the benefit of the favorable long-term capital gains rate when you sell (if you have the stock for at least a year and a day), that isn't the case if you buy bullion or gold coins.
Instead, when you buy gold in these forms, you pay taxes on any gain that comes from selling at the collectible rate, which is currently 28%. You can get a bit of a break if you hold gold in an IRA, but you need to make sure that you are following all of the procedures correctly so that you don't wind up in trouble with the IRS.
It's also worth noting that gold jewelry isn't taxed this way when you sell it. This prompts many people to develop what they call “heirloom” collections. These collections of gold jewelry aren't subject to the collectible tax, and can be one way to invest in physical gold without worrying about the same tax issues.
You do have to consider, though, the special issues that come when you have something that can have such subjective value when you try to sell it as jewelry.
2. Where Will You Store It?
It's important to consider where you will store your physical gold. There are banks and other institutions that will store it for you. However, you need to make sure that you are willing to pay the fee that comes with such storage. This will reduce your overall return.
Another consideration when you store your physical gold in a separate location is whether or not you can get at it. If you are investing in physical gold as a way to hedge against economic and societal collapse, you might not be able to get to your gold if it is stored off-site.
You can store your physical gold at your residence, but it's usually a good idea to take precautions. When I lived in Utah, I knew several people who had special safes that they used to store their bullion and coins (and, often, guns and ammo). They were somewhat quiet about their stash, though, since they didn't want to become targets.
Also, understand that it can be difficult to transport physical gold. If you need to leave your home in a hurry, bringing your entire stash might not be practical. Having your physical gold in coin or jewelry form can make it a little more portable — and easier to hide, if you need to keep it a secret.
Consider your reasons for owning physical gold, and determine where and how you will store it. Your goals and reasoning will likely have a lot to do with where you decide to keep your gold.
3. Will Gold Prices Really Go Much Higher?
Another consideration is the price you are buying at. As of this writing, gold is sitting at right around $1,230 an ounce. I remember when gold was through the $1,700 an ounce level and people were talking about gold $2,000 as if it was inevitable. You have to consider whether or not you think that the price of gold is going to truly increase in a significant way.
One of the things you have to think about when looking at today's gold prices, and considering how much higher they can go, is the fact that you often have to premium when you invest in physical gold, so you usually pay more than the market rate. You have to factor that into your potential for long-term gains.
On the other hand, if you think inflation is going to be a serious problem in the future, and if you think hard assets are an important part of surviving a severe economic event, today's physical gold prices might seem like a bargain.
Physical gold can be a strong addition to your investment portfolio, as long as you are careful about how you approach it. Think about your reasons for making the investment, and go in with your eyes open to the realities of investing in physical gold, and you'll be in a better place.
Do you invest in physical gold? Why or why not?