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Ever noticed how gold is back in the limelight again – especially physical gold? So, whether you’re into gold coins, or investing in a gold account and receiving a record of numbered gold bars in your name, read on. It is important that you recognize the challenges that can come when investing in physical gold.
Physical gold can be a way to diversify and can provide you with a valuable tangible asset that you can sell when times get tough.
If you believe some doomsayers, the US dollars would become utterly worthless soon so having actual gold in hand might be an advantage. Whatever you believe in, it makes sense to know all about investing in physical gold before you jump right into it.
How to Buy Physical Gold
Here’s the rub: once you’ve decided to make gold part of your investment portfolio, you have to be familiar with what gold products are available to purchase. Equally important is knowing how and where to purchase them from.
Gold may be gold but there are actually a variety of choices available for investors. If you are buying gold through a cash purchase and are intending to store it for yourself, there are unlimited options.
But, if you are buying gold for your IRA, then you are stuck to IRA-permissible gold. Buying gold is not similar to buying gold mining stocks or investing in gold ETFs . Gold is a physical product and sellers ship it to your address or to an IRS-approved depository for storage in case of IRA gold. Here are a few options if you are shopping for gold:
- Bullion Gold Coins
- Proof Gold Coins
- Gold Bars
- Numismatic Gold Coins
Each type of gold comes with its own advantages and disadvantages when you purchase them. You can talk to your gold broker to discuss your needs and how to pick the type of gold products that would be most appropriate. Normally, you can just do this via a phone call.
Here’s a summary of the main pros & cons (click to see explanation or scroll down):
|Inflation Hedge||Storage of the Physical Gold|
|Security of Value||Not A Passive Income Asset|
|Portfolio Diversification||Premiums and Taxes|
|Simplicity||Gold Has A Terrible Historical Return|
|Hedge Against a Disaster|
Advantages Of Investing in Physical Gold
Any investor worth his dollar would know that he must consider all the pros and cons associated in his investment choices, gold included. Let’s kick off with the advantages:
Inflation often instills fear in the hearts of investor because it will almost always affect the value of the money they have in the bank. As time goes on, the purchasing power of the dollar predictably declines. If you happen to get your hands on an old magazine, it may come as a shock to see how ‘cheap’ the prices are in the advertisements or the cost of the magazine itself.
For example, in 1990, the average price of a house in the US was $150,000. Fast forward 20 years later, the average cost has gone up to $220,000 in 2010. Did the house actually appreciate or did the value of the dollar fall?
But let’s look at the same house using gold as the currency. In 1990, gold was selling on an average price of $383 per troy ounce. Should you want to purchase a house then, it would have taken 392 ounces of gold. Jump to 2010 where the average price of gold has risen to $1118 per troy ounce. The house worth $220,000 in 2010 would only set you back by 197 ounces of gold. Gold’s purchasing power remained stable over that twenty-year period but the value of the dollar took a downturn.
In January 2005, the price of gold was pegged at roughly $435 per ounce. In December 2014, the price had gone up to as high as $1,180 per ounce. If you compare that to the 24% inflation rate over the ten-year period in question, you can see that the ascent of gold prices is far greater than inflation rates.
Security of Value
One of the primary attractions of gold as an investment option is the security of knowing that the price is going to rise steadily over time. Of course, historically, the price does dip from time to time – but it always goes back up. If we look at the historical charts for reference, we can safely conclude that the price of gold is almost certainly going to be higher ten or twenty years from now.
Unlike stocks, bonds or mutual funds, you won’t have to worry whether a particular industry or corporation is performing when you check the value of your gold investment. Although the current state of the economy has some effect on gold prices, a slumping economy does not automatically pull the gold prices down. Just the opposite, economic uncertainty drives more people to invest their money in gold, which in turn pushes the price upward.
Probably, the biggest benefit of investing in gold is portfolio diversification. As we have mentioned, the price of gold performs very well in times of uncertainty. Therefore, a splendid way to balance the volatility and returns within your investment portfolio is to include gold in your line up.
Specifically, the inclusion of gold as part of a diversified portfolio protects you against a “wealth wipeout” in extraordinary situations such as severe economic depression or stock market crash.
Let me say this straight: investing in gold is surprisingly elementary and newbies can learn how to do it quite fast even without much experience in money investment. If you talk to a broker or financial analyst, chances are, you will hear more about the inconveniences of investing in gold. They are not likely to tell you how easy it is to buy gold for investment purposes. The truth of the matter is, there is no shortage of gold dealers around the United States, all happy to sell whether in the form of jewelry, coins, or bullion bars.
And when it comes to storing your gold, you need not worry nor fear. A simple deposit box at your bank is sufficient to store your gold safely, securely, and conveniently. As you acquire more gold over the years, all you have to do is get more safe deposit boxes. Then your investment stays safe in the best way possible.
Hedge Against a Disaster
Let’s face it. Any investor would have a fear about how their investment would turn out but it seems this fear becomes less when it comes to gold investing. For instance, should the market crash that happened in 2008 recur, it would wipe out your investment portfolio if it was made up of only stocks, bonds, and mutual funds.
But if someone put in a substantial portion of their long-term investment money in physical gold, he would probably be at peace. His investment will not really be adversely affected by a financial crisis or global markets meltdown. In fact, the price of gold usually goes up during such situations because more people shift to physical investments as their faith in the financial markets deteriorates.
Disadvantages Of Investing in Physical Gold
Although we are a staunch advocate of gold and silver investing, some of our views on this investment technique have been swayed largely because of the cons below.
Storage of the Physical Gold
The very first problem with investing in physical gold is where you are going to store the precious metal. Do you have a big and sturdy safe at home where you can just safely keep your collection of gold? Or maybe you’re keeping all the gold in a safe deposit bank your bank? In either case, it is not 100% theft-free.
Of course, you might not have the capacity to store the gold yourself. Some investors would often use pooled accounts to help them store their physical gold. All the gold is in a vault and each investor has numbered bars or coins specifically allocated to them. Some have a record of a sum of gold (unallocated) assigned to them.
In the case of an allocated account, investors have to pay a storage fee and an insurance fee. With an unallocated account, the fees don’t add up much but the gold might remain in the name of the company. This puts the investor at risk should the company goes belly up and creditors get the gold.
Storing the gold onsite gives you a quick access to it, but it is prone to disasters and theft. If your store it offsite, you might not get easy access to it when in case you want to.
Not A Passive Income Asset
Many financial experts, including Warren Buffet, believe that investments should produce income. Gold does not really meet this condition because it produces nothing when you own it. If you want to become wealthy, then you should choose an asset that will make you wealthier. Warren Buffet started doing this when even as a boy he bought a piece of land. He knew that the value of the land would increase but more than that, he realized he could earn from it.
A local farmer wanted to rent his land and pay him an annual rent. After a few years of receiving rental income, Warren could reinvest his money by buying more land. And he could do that repeatedly! This system allowed him to buy assets that gained in value, but also gave him income while owning them.
Premiums and Taxes
Another thing about physical gold is that you always have to consider the premiums and taxes issue. Normally, you pay a premium when you buy the metal – it is always marked up from the current market price. Annoying, isn’t it?
Premiums are usually less with pooled accounts but sellers never remove them. This means that in the event that gold loses its value, albeit unlikely, you incur a loss equal to the current value of the gold. On top of that, you increase your loss because of the additional premium you have paid to buy it in the first place.
There’s also the double whammy. The IRS taxes gold as a collectible. Therefore, when you sell your gold for a profit, you must pay capital gains tax, which currently stands at a maximum of 28%. On the other hand, if you purchase gold stocks, you will pay the “regular” capital gains rate; you won’t have to pay the collectible rate but you have to if you invest in a gold ETF.
Gold Has A Terrible Historical Return
Here’s another problem with gold. Let’s suppose you went back 200 years and put $10,000 in gold, $10,000 in bonds, and $10,000 in stocks. Now, which of these investments would come out ahead? Well, if you are smart, gold would be your last choice among the three options because amazingly, it performs very poorly compared to the other two.
So, after 200 years…
- The gold will have a value of $26,000.
- The stocks will be worth $5,600,000,000.
- The bonds will be worth $8,000,000.
Believe it or not, based on historical returns, gold is a lousy investment choice.