Before You Invest: Considerations Associated with Gold Investing

As of this writing, gold futures are very close to $1,700 an ounce. For gold bugs who think that gold can only go up, up, up, it is tempting to run out and invest. However, before you decide that the gold market is your ticket to wealth and happiness, it is important to think about the situation, and consider some of the realities associated with investing in gold.

Where Will You Keep It?

Your first issue is this: Where will you keep your gold? When you invest in gold stocks or gold ETFs, this isn’t much of an issue, since you aren’t buying physical gold. However, if you decide to invest in physical gold (watch out for scams), something needs to be done with that gold.

You can either have it shipped to you — incurring costs — and store it yourself in a safe or safety deposit box, or you can have someone else store it for you. There are a number of companies that will store gold for you, issuing you serial numbers for individual gold bars or issuing you a statement of how much gold you own in a pooled account. You will probably have to pay a storage fee when someone else keeps the money for you.

Tax Implications When You Sell

If you are investing in gold stocks, you don’t have to worry too much about the taxes. Gold stocks are treated just like any other stock — you are taxed at whatever capital gains (long-term or short-term) rate you qualify for. However, gold EFTs and physical gold are another story. Instead, you are taxed at the collectible capital gains rate, which is currently 28%.

For those who have jewelry, though, it is possible to sell without paying any taxes. It’s important to double check the tax implications of the gold you are investing in. If you see gains, and you want to profit from them, you need to know where you stand with taxes.

Is Gold in a Bubble?

Another question you have to ask yourself about investing in gold is whether or not you believe gold is in a bubble. There are some that believe that gold could plunge quite quickly — especially if the Federal Reserve decides to raise rates (unlikely given the recent pledge to keep rates low through 2014) and if the economy begins to recover. If gold is in a bubble, and if that bubble bursts, it could spell disaster for those counting on gold to reach $2,000 or even $2,500 an ounce.

Gold bugs, of course, believe that this is the “new normal” and that we will continue to see gains by gold. With the problems of economic instability around the world, and low interest rates possibly leading to high inflation (gold is often seen as a hedge against inflation), many think that gold can only go higher.

You have to decide what you think is likely to happen. Buying now may mean that you can make more if gold continues to rise, but if gold is in a bubble, you could see huge losses if the gold bubble bursts.

Bottom Line

Gold can be a helpful part of a diverse portfolio. However, it is important to understand the issues related to investing in gold so that you can go in with your eyes opened, and prepared for the risks that exist.