Is gold a good investment for you?
For thousands of years, humans have looked to gold as an investment and as a store of value. When the economy is questionable and when the stock market is volatile, many investors start asking, “Is gold a good investment?” and “Should I invest in gold?” If gold is on your mind, double-check your goals and long-term investment strategy, and make sure it fits appropriately into your portfolio. Before you invest, it’s important to understand how the system works. Like any investment, you run the risk of loss — and that risk is magnified if you don’t have the facts. If you’re interested in gold, here are a few things to keep in mind.
Gold stocks aren’t the same thing as physical gold.
Some investors like investing in gold stocks because they offer exposure to gold. However, it’s important to note that you are, in fact, investing in stocks and not actual, physical gold. You might be investing in a gold mining company, but you’re not actually investing in the gold itself. If you like the idea of exposure to gold, but don’t want to buy the physical commodity, gold stocks can be a good choice. Depending on the situation, gold stocks might buck the trend when the rest of the market is down. While this isn’t always the case, it’s worth considering when deciding if gold is a good investment for you.
Gold certificates are vulnerable to scams
“Paper gold” or gold certificates can make the whole investment process a little simpler. However, understand that when you invest in a gold certificate, you don’t actually see or hold the gold. You’re thought to have it, but your only evidence is paper. During times of economic downturn, scammers are out in full force. Watch out for those who claim to be selling paper gold during this time, especially if they seem relatively new on the scene. If you decide to invest in gold certificates, it’s important to verify the broker. Make sure they are trustworthy. With paper gold, there’s a chance that an unscrupulous company could actually sell the same gold multiple times. When you go to “cash in” during an emergency, such scams are revealed.
You need a safe place to store physical gold
If you’re asking, “Should I invest in gold?” you need to think about what you’ll do with the actual physical asset. When you invest in physical gold, including coins and bullion, you need a safe place to keep it. If you prefer to manage the storage yourself, buy a strong, reliable safe for your gold. If you can’t store it on your own premises, you can use a safe deposit box at a local bank or credit union. It’s also possible to pay for storage at facilities designed to store large amounts of gold. However, if you store your gold off-site, you have to be prepared to pay a fee, reducing your overall potential gains.
Gold bullion and gold coins are different
As you invest in physical gold, you’re likely to choose between gold bullion and gold coins. Understand that with certified coins, while the gold content and fineness matters, their rarity is a factor as well. You want to get certified coins that have been verified by another party. Because their value is based on their rarity, they can be similar to collectors’ items. So, even if gold bullion loses value due to a drop in the spot price of gold, your certified gold coins might maintain their value — or even increase in value. Before you decide to invest in bullion or coins, understand how each works, and what your goals are.
Physical gold is taxed at the collectibles rate
One of the advantages of investing is that you have the opportunity to receive a favorable tax rate. Long-term capital gains are often taxed at a lower rate than your own marginal rate. However, this rate doesn’t apply to physical gold. If you sell your gold bullion or coins, you’ll be taxed at the collectibles capital gains rate. For short-term assets, that is your marginal tax rate. For long-term assets, it’s your marginal tax rate, capped at 28%. Depending on your marginal tax rate, this may or may not be an advantage. No matter the situation, though, you should be aware of the tax rate and prepare accordingly if you decide to sell some of your gold.
You might pay a premium when you buy gold
When you buy gold, you don’t just pay the price stated. Sometimes you pay a premium. You might have to pay a markup when you buy the gold. As a result, your gains aren’t realized until you overcome whatever premium you paid. Plus, if you’re paying to store your gold, that cost, added to the premium, can cut into your profits. Before you decide if gold is a good investment, make sure you understand the costs, from the premium to storage to the higher capital gains rate. All of that should figure into how you fit gold into your portfolio.
Gold doesn’t always move inversely to the U.S. dollar
One reason many people view gold as a good investment is as a hedge against risk or against inflation. Many investors like it because it has the potential to be a store of value when stocks crash or the economy tanks. Often, gold moves inversely to the U.S. dollar, which also makes it attractive. However, gold doesn’t always behave as investors expect. Sometimes it doesn’t move inversely to the dollar, and sometimes gold drops at the same time the stock market does. While it can be a good choice, just realize gold, like any investment, is impacted by perceived value, and it doesn’t always act like you think it should.
Things to know before investing in gold
- Gold stocks aren’t the same thing as physical gold
- Gold certificates are vulnerable to scams
- You need a safe place to store physical gold
- Gold bullion and gold coins are different
- Physical gold is taxed at the collectibles rate
- You might pay a premium when you buy gold
- Gold doesn’t always move inversely to the U.S. dollar