Which funds to pick: miners or bullion?
Buying mutual funds or exchange-traded funds (ETFs) that invest in gold miners or bullion is the simplest way to get gold exposure. The two biggest gold ETFs, SPDR Gold Trust (GLD) and iShares Gold Trust (IAU), buy gold bullion and store it in bank vaults. These ETFs trade throughout the day like stocks on an exchange and sport low annual expenses of 0.25 percent to 0.4 percent.
Mining companies are another way to play gold’s ascendancy, but have their own host of issues – worker strikes, environmental and energy issues, political instability, etc. – so it may make sense to buy a basket of miners in an ETF or fund. For cheap exposure to miners, there’s Market Vectors Gold Miners ETF (GDX), a collection of large-cap mining stocks. Fidelity and Vanguard both offer cheap mutual funds investing in miners, though their annual fees won’t be as cheap as ETFs.
One positive about owning mining stocks is that they often pay a dividend, which other types of gold investing don’t offer. However, mining stocks can get taken down with all other equities when the stock market tumbles. That’s why financial advisers often recommend buying the ETFs that own gold, to get true diversity in your portfolio.
Collectible coins vs. bullion
Some people prefer to own the real thing. Bullion, in the form of gold bars or coins such as the American Eagle, is the easiest form of physical gold for which to compare cost, buy, and resell. You can check the price of gold at Kitco or the World Gold Council, and easily compare prices of gold sellers, the premiums they charge, and any shipping costs. (When you buy physical gold, you’ll pay a premium that could be a few percent beyond spot price, and you’ll also pay this spread when you sell it). Blanchard, American Precious Metals Exchange and Kitco are some gold dealers that allow for easy cost comparison. You can find basic info on gold and a list of dealers at the U.S. Mint.
Investing in collectible coins should only be done if you are prepared to learn the market. Collectible coins are harder to evaluate and resell than bullion, and often come with higher margins and markups. And dealers may entice you into buying rare coins by playing into your fears with pitches that collectibles are safe from confiscation by the federal government and that you can sell them anonymously, without having to report your Social Security number to the government.
If you’re leaning towards buying physical gold, you need to figure out where to store it. Some sellers will hold it for you for a percentage of your holdings annually while others charge a flat fee. (Scammers may offer to store nonexistent gold for you, and say that is held somewhere in Europe, for example). You can have gold shipped to you (generally at cost to you) and you can put it in a bank safe deposit box or store it with a private company. Or if you want to be able to touch your gold, you can store it at home.
But stored gold may need to be insured. If the gold dealer who holds your gold goes under you may become a creditor waiting in line to see how the bankruptcy shakes out, so see what its policies are. Check to see if the type of storage they offer is “allocated storage” -which means that the title to the gold is in your name, or “unallocated storage” – where you have a paper slip for the value of the gold. Though this is cheaper than allocated storage, it makes you a creditor if the dealer or bank goes bankrupt.
The contents of safety deposit boxes typically aren’t insured, and your homeowner’s policy probably won’t cover much in the event of a theft. You can buy insurance on your own. (Gold stored in your own home will cost more to insure than stored in a bank).
If you should ever choose to part with your gold, determining what bite Uncle Sam takes can be tricky. Unlike stocks, which are taxed at your regular income rate when held for under a year, and 15 percent if held longer, physical gold held longer than a year is taxed at your ordinary tax rate up to a maximum of 28 percent. ETF’s, such as SPDR Gold Trust(GLD) or iShares Gold Trust(IAU), are also taxed at the 28 percent maximum. However, long-term gains from gold mining company stocks or funds that invest in mining companies qualify for the preferential 15 percent long-term capital gains rate. To make things more complicated, a few funds invest in mining companies and also hold some bullion, in which case portions of the fund will be taxed differently.
There are also restrictions if you want to shelter gold in an IRA. Generally, collectible gold cannot be held in an IRA, though some bullion coins and bars can, as well as gold bullion ETF’s and some closed-end funds that invest in gold.
Michael Allegro is a New York-based personal finance writer who specializes in consumer interest, investing, banking products, and travel.