Like many investments, gold bullion fluctuates in value — but unlike stocks and bonds, you get no interest or dividend payments when you invest in this yellow metal. So if the value of gold drops, you lose money. Still, there are some good reasons to invest in precious metals, particularly gold.
When international governments are in turmoil, gold serves as a hedge against geopolitical risk. Owning gold might protect your money from currency devaluation and could also protect you if there is a stock market plunge. Find out how to make gold a part of your investment strategy.
5 Ways You Can Invest in Gold
Ultimately, investors looking for a portfolio of diversified investments might want to invest some gold. When choosing how to invest in gold, there are many different options, from buying stocks and mutual funds to owning the bullion itself. Here are five ways you can invest in gold:
1. Buy Physical Gold
You can buy gold jewelry to get started investing in gold, but the pure play is to buy gold in the form of bars and coins. A gold coin contains one troy ounce of gold or 1.1 U.S. ounces. As of Dec. 18, 2017, the gold price per ounce was $1,258.92.
You can store gold coins in a safe deposit box for $50 to $100 or more annually at a bank or shell out about 1 to 1.5 percent of their value to store them with a broker. Whichever you choose, the fee will typically cover your investment against theft or loss.
Buying gold bars is another option. One advantage if you want to buy gold bars over coins is that the bars’ commission prices are typically lower.
A disadvantage is that physical gold is taxed as a collectible when you sell it, and the tax rate is higher than the long-term capital gains rate for stocks. Another negative is that gold doesn’t pay dividends or interest.
2. Purchase Gold Funds
In case you’re not interested in investing in coins and bars, you might want to consider mutual, exchange-traded and closed-end gold funds. These funds invest in securities held by companies involved in gold-related activities.
A gold ETF trades like a stock — you can buy and sell it for a small commission; gold mutual funds are only priced at the end of the day.
Closed-end funds trade like stocks but are structured as trusts — each share represents a portion of the fund’s entire gold investment portfolio. CEFs are more complicated than mutual funds and ETFs and, in many cases, require different tax treatment.
Gold mutual, ETF and closed-end funds might provide an advantage over owning physical gold. You’ll pay a management fee for owning them, but you won’t have to store the bullion. In addition, most gold funds are taxed at the collectibles rate.
3. Invest in Gold Mining Stocks
Gold mining stocks and ETFs diversify your gold-related investment — they invest in the gold mining process, and their prices typically move in the same direction as gold prices. Additionally, gold mine production and financing costs impact these stocks.
You can buy and sell mining stocks through your investment brokerage account. But keep in mind that if you hold them for more than a year, they’ll be taxed as long-term capital gains, which is more favorable than physical gold’s collectibles tax rate.
4. Consider Gold Exchange-Traded Notes
Gold exchange-traded notes are debt or bond-like securities that offer a rate of return aligned with an underlying gold index. Similar to gold mining stocks and funds, ETNs don’t own physical gold.
At maturity, a gold ETN’s return is comparable with the gold investment return during the note’s time period. And a gold exchange-traded note’s solvency is linked to the strength of the note’s issuer, so if the ETN issuer goes bankrupt, you could lose all or part of your money.
Remember that if you keep a gold ETN, you can benefit from the long-term capital gains tax treatment. These investments are traded on typical investment exchanges, and you can buy them through your brokerage account.
5. Buy Gold Futures Contracts
Consider buying individual gold futures contracts, which are agreements to buy or sell standard quantities of gold at a specified price, place and time, if you’re not averse to risk. Futures enable you to gain — or lose — a large amount of money when there’s a small movement in gold prices.
Futures contracts are usually traded on the COMEX exchange, which is part of Chicago’s CME Group. When you buy or sell a gold futures contract, you don’t pay the entire amount up front; you pay only a small percentage of the total price when you buy and pay the remainder in full at a later date.
Typically, investors purchase gold futures with ETFs or ETNs, and you can buy these funds in your investment account. The tax treatment consists of a 60 percent long-term capital gain and 40 percent short-term capital gain. Investing in futures contracts is best for speculators and risk seekers.
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John Csiszar contributed to the reporting for this article.