Binyamin Finkel was a traditional guy, and gold was a most traditional investment. After all, gold had been around forever and it’s still treasured by every culture globally. He’d invested in real estate and even some blue-chip stocks, but he figured he should make a significant commitment to gold too. But how did one invest in gold today? Sure, his wife would love it if he bought her some elaborate pieces of jewelry, but that seemed like a purchase, not an investment.
What options do gold investors have today? What are the pros, cons, and technicalities for each?
Gold can be a good 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 in the form of 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, it is expensive, cumbersome, and even potentially dangerous to buy and store large quantities of physical gold.
Bullion is Better
A woman may advocate for wearable wealth; there are many reputable jewelry dealers, which makes it a relatively easy and fun choice. 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 that can weigh several hundred ounces. Gold bullion offers a purer and more reliable investment in gold compared to gold jewelry. If you 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 jewelry’s cost lies in the craftsmanship of the piece, not the actual metal, and much of that value gets lost in a resale. Bullion is comparatively “over l’socher.”
Researching Physical Gold
Either way, the buyer of physical gold needs to work with reputable dealers. 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 in a safe manner.
Protecting Physical Gold
Investors must store physical gold in a secure location such as a safe bank deposit box or private vault. They probably 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 buy 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.
Gold ETFs have therefore become quite popular. SPDR Gold Shares (GLD) has over $70 billion in assets under management, while iShares Gold Trust (IAU) has $20 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 not to have to deal with the physical logistics.
Gold Industry Mutual Funds
A slightly different approach than buying gold ETFs, which actually 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 a 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 attached chart 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, but gold, the world’s original currency and movable asset, can be good for a portion of a well-diversified portfolio. Now you know your options should you choose to add it to the mix.
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