How to Invest in Gold

There are many different ways that investors can invest in gold. In fact, you might already own some and not even know it! With gold rising as a popular investment alternative, many mutual funds and actively managed exchange-traded fund managers are plowing money into different types of gold investments: physical bullion, gold ETFs, or gold mining companies. We’ll weigh the pros and cons of each type of gold investment below.

Physical Gold Bullion
One of the most popular methods for owning gold is to buy it directly from a coin shop or retailer as a bullion bar or coin. Typically sold in quantities ranging from 1 gram to ten ounces, investors can purchase gold to store themselves in their own home or safe deposit box.

Physical gold ownership has one inherent benefit: it is always in your possession. However, there are a few downsides. First, gold purchased at a coin shop will cost 3-5% more than the current spot price, in order to cover the cost of operating a coin shop plus the cost of transporting gold to the shop. Secondly, the IRS is unforgiving with physical metals investors. Gold bullion is not considered an investment, and instead is taxed as a collectable. Thus, gold does not qualify for the long-term capital gains tax rate of 15%, so investors will have to pay their normal income tax rate on any gains. While capital gains cap at 15%, income taxes rise well into the mid-30%. Not all gold is taxed this way, though…

Gold Exchange-Traded Funds
Gold ETFs are all the rage on Wall Street. With a gold exchange-traded fund investors can buy into a large supply of gold stored in vaults all around the world. The GLD ETF, for example, is designed to track the price of 1/10th of an ounce of gold, and as a result, owning one share of this popular fund means that you own basically 1/10th of one ounce of gold.

Since exchange-traded funds are undeniably investments, they retain their excellent standing with the IRS and are taxed only at the maximum long-term capital gains tax rate of 15%. However, they have their costs as well. First, one must open a brokerage account in order to trade ETF shares, and you’ll incur commissions for each trade. Secondly, the company that runs the ETF takes a cut each year of the total gold in its possession of roughly .5%. Thus, if you were to purchase $1000 of gold through an ETF, you’d have only $995 in gold at the end of the year. However, keep in mind that gold can easily rise far higher and faster than .5% per year, which in reality, isn’t that large of a fee for proper safekeeping of one of the world’s most valuable metals.

Gold Mining Stocks
Gold mining stocks are a great way to achieve exposure to the gold markets without taking physical delivery of gold, or buying gold exchange-traded funds. Unlike gold itself, you won’t have gold, but you will own part of a company that mines, refines, and sells it!

The benefit of gold mining stocks is that they rise and fall with gold, often to higher highs and lower lows, allowing for faster appreciation of your money when gold is going up in value. When the value of gold declines, however, gold mining stocks can fall quickly.

Another benefit is that unlike gold, gold mining companies routinely pay dividends to investors in the form of annual, semiannual, or quarterly disbursements. This makes gold mining stocks attractive because they generate an income AND appreciate, whereas gold only appreciates or depreciates, and doesn’t pay an income.

A final benefit is that of taxation. Like ETFs, gold mining stocks are considered investments and taxed at the capital gains rate of 15% for positions held greater than one year.

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