In a previous article, I explained why gold is not a great inflation or doomsday hedge. But it can still be a reasonable place to park a small chunk of one’s portfolio. There are several ways retail investors can invest in gold, each with its own set of pros and cons.
Physical Gold
Historically, investors owned gold through coins, bars, or jewelry. Owning a gold hoard as a physical asset provides a unique sense of security and tangibility. Tangible gold can be moved around in pockets, suitcases, and car trunks without intermediaries, bringing to mind anecdotes of quick escapes made during times of crisis or peril. But, anecdotes aside, buying and storing large quantities of physical gold is expensive, cumbersome, and even potentially dangerous. Fees and markups can be substantial, too.
Bullion is Better
A woman may advocate for wearable wealth. There are many reputable jewelry dealers, and building a stash of jewelry is a relatively easy and fun choice for gold ownership. But for those wanting to hold physical gold as an investment, bullion is probably the better option.
Bullion is a high-purity slice of precious metal sold in various sizes and denominations, from small bars or coins to large bars weighing several hundred ounces. Compared to gold jewelry, gold bullion offers a purer and more reliable investment.
If you have ever tried selling a piece of jewelry, you’d quickly see why. It’s hard for a jewelry seller to prove the purity and weight of an item. Also, much of the jewelry’s cost lies in the piece’s craftsmanship rather than the actual metal, and much of that value gets lost in a resale. Bullion is comparatively “over l’socher.”
Researching Physical Gold
Either way, physical gold buyers need to work with reputable dealers. They should research purity, prices, and policies and get guidance from knowledgeable advisers and industry organizations like the American Numismatic Association.
Another easy path to physical gold ownership is actually the US government’s mint. The mint produces and sells a variety of gold and silver bullion coins, including the American Gold Eagle and the American Silver Eagle. These bullion coins are easy to buy and sell safely.
And Costco’s recent foray into the gold market was recently in the news. The popular and ever-creative retailer started selling gold bars on their website, racking up hundreds of millions in sales monthly! Costco is a reputable seller, and many people seem to want to snag some pure gold along with their tubs of Helman’s mayonnaise and Kirkland spring water.
Protecting Physical Gold
Investors must store physical gold in a secure location such as a safe bank deposit box or private vault. They may also want to look into insurance and generally contemplate security challenges involved in owning large sums of movable, untraceable valuables. The following anecdote is admittedly a bit extreme, but still makes a vital point.
Datta Phuge, a wealthy businessman from Pune, India, made headlines in 2013 for commissioning a custom-made gold shirt worth about $250,000, made from 1.5 kilograms (3.3 pounds) of gold. Phuge was known for his lavish lifestyle and was often referred to as Gold Man in the Indian media. In 2016, Gold Man was ambushed by a group of unknown assailants at his home and beaten to death. Shocking, right?
Gold ETFs
A modern approach to owning gold is buying shares of exchange-traded funds (ETFs), which then purchase gold on behalf of their customers and store the piles of certified bullion bars in private vaults. For a nominal fee, the fund managers take responsibility for buying, securing, and insuring gold for sums large and small. Because these funds actually buy gold, their share prices track the price of gold perfectly and offer investors a simple and convenient way to gain investment exposure to the metal instantaneously and effortlessly.
Therefore, Gold ETFs have become quite popular. SPDR Gold Shares (GLD) has over $62 billion in assets under management, while iShares Gold Trust (IAU) has $28 billion. GLD charges an expense ratio of 0.4%; IAU is a bit less expensive. Investors can buy or sell shares of these ETFs through any brokerage account, like any other stock. Many gold investors consider the fees well worth it and prefer to avoid dealing with the physical logistics.
Gold Industry Mutual Funds
A slightly different approach than buying gold ETFs, which hold only physical gold, is buying mutual funds that invest in gold-mining companies. These companies own gold via the mines, and some investment strategists feel they are better for portfolio diversification versus pure gold. The VanEck Vectors Gold Miners ETF (GDX) charges .51% annually and is easily available via any online brokerage. Keep in mind that these mutual funds can be particularly volatile, and they do not track the price of gold. Personally, I’m not a fan.
Taxation Twist
Here’s another quirk to be aware of when investing in gold: For some odd reason, gold is treated as a collectible for tax purposes, and capital gains are subject to higher tax rates than stocks or real estate. (Gold-mining shares are treated as stock investments.) Consult your accountant, but you may want to own gold within IRAs or other tax-sheltered vehicles.
A Worthy Diversifier
You can see in the chart above that gold (as represented by the GLD ETF) has been a solid, if unspectacular, performer in recent history. It has underperformed the general stock market (SPY or the S&P 500) and crushed the aforementioned gold miner ETF. I don’t think investors should tie up too much of their wealth in an asset that does not offer rent or dividends. Still, gold, the world’s original currency and movable asset, can be good for a portion of a well-diversified portfolio. You now know your gold options, should you choose to add it to the mix.
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