As inflation fears rise, investors might turn to gold.
For thousands of years, humans have looked to gold as an investment and as a store of value. When the economy is questionable or the stock market is volatile, many investors start asking, “Is gold a good investment?” and “Should I invest in gold?” If gold is on your mind today, double-check your goals and long-term investment strategy, and make sure the precious metal fits appropriately into your portfolio. Not only is gold known for being a portfolio diversifier but with inflation fears on the rise, investors tend to turn to gold because it is considered a good hedge against rising prices. Before you invest, it’s important to understand how gold works. Like any investment, you run the risk of loss — and that risk is magnified if you don’t know the facts. If you’re interested in gold, here are a few things to keep in mind.
Gold stocks aren’t the same thing as physical gold.
Some investors like investing in gold stocks because they offer exposure to gold. However, it’s important to note that you are, in fact, investing in stocks and not actual, physical gold. You might be investing in a gold mining company focused on the production of gold, like Franco-Nevada Corp. (ticker: FNV), Newmont Corp. (NEM) or Barrick Gold Corp. (GOLD), but you’re not actually investing in the gold itself. If you like the idea of adding exposure to gold but don’t want to buy the physical commodity, gold stocks can be a good choice. Depending on the situation, gold stocks might buck the trend and fall in value when the rest of the market is down. While this isn’t always the case, it’s worth considering these scenarios when deciding if gold is a good investment for you.
Gold’s relationship with the U.S. dollar.
Gold and the dollar tend to have an inverse relationship, meaning their prices move in different directions. For this reason, gold can be viewed as a hedge against the dollar and other fiat currencies, says Juan Carlos Artigas, head of research, World Gold Council. “A weaker dollar is usually supportive of gold and vice versa,” Artigas says, but he acknowledges that there are exceptions. “During periods of systemic risk, both gold and the dollar tend to be used as safe havens and may move in a similar direction.” While gold can be a good choice for your investment portfolio, like any investment, it’s affected by perceived value and may not always act like you think it should.
Physical gold is taxed at the collectibles rate.
Investors have a variety of different ways to gain exposure to gold, says David Keller, chief market strategist at StockCharts.com. This ranges from physical gold to gold exchange-traded funds or closed-end funds to gold mining stocks. One of the advantages of investing in gold is the opportunity to receive a favorable tax rate. Long-term capital gains are often taxed at a lower rate than your marginal rate. However, this rate doesn’t apply to physical gold. If you sell your gold bullion or coins, you’ll be taxed at the collectibles capital gains rate. For short-term assets, that is your marginal tax rate. For long-term assets, it’s your marginal tax rate, capped at 28%. No matter your situation, you should be aware of the tax rate and prepare accordingly if you decide to sell some of your gold.
Gold doesn’t provide consistent returns.
While there are several notable advantages to investing in gold, there is a particular downside. Gold does not provide consistent income for investors. While publicly traded companies produce goods and services that consumers find valuable, gold does not have any output. Michael Reynolds, vice president of investment strategy at Glenmede, calls this a “serious structural disadvantage relative to other asset classes.” While stocks pay investors dividends and bonds produce interest payments, “gold does not spontaneously breed more gold,” he says. Rather, you profit from gold as its price increases. “Gold derives 100% of its returns from the movement of its price, which can and has led to long stretches of underperformance,” Reynolds says.
You might pay a premium when you buy gold.
When you buy gold, you don’t just pay the price stated. Sometimes you pay a premium or a markup. This premium is included in the final price and may come from manufacturing, distribution or other costs. Gold that requires more labor cost to produce tends to be tagged with higher premiums. Consequently, your gains aren’t realized until you overcome whatever premium you paid, which can cut into your profits. Before you decide if gold is a good investment for you, make sure you understand the costs — from the premium to storage to the higher capital gains rate. All of that should figure into how gold fits into your portfolio. This shouldn’t steer you away from buying gold, of course, but it’s important to be aware of the costs of investing in the precious metal.
Gold bullion and gold coins are different.
As you invest in physical gold, you’re likely to choose between gold bullion and gold coins. Understand that with certified coins, while the gold content and fineness matter, their rarity is a factor as well. You want to get certified coins that have been verified by another party. Because their value is based on their rarity, they can be similar to collectors’ items. So even if gold bullion loses value due to a drop in the spot price of gold, your certified gold coins might maintain their value — or even increase in value. Before you decide to invest in bullion or coins, understand how each works and keep your goals in mind.
Gold certificates are vulnerable to scams.
“Paper gold” or gold certificates can make the whole investment process a little simpler. However, understand that when you invest in a gold certificate, you don’t actually see or hold the gold. You’re thought to have it, but your only evidence is paper. During times of economic turbulence, scammers are out in full force. Watch out for those who claim to be selling paper gold during this time, especially if they seem relatively new on the scene. If you decide to invest in gold certificates, it’s important to verify the broker. Make sure they are trustworthy. With paper gold, there’s a chance that an unscrupulous company could sell the same gold multiple times. When you go to “cash in” during an emergency, such scams are revealed.
You need a safe place to store physical gold.
If you’re asking, “Should I invest in gold?” you need to think about what you’ll do with the actual physical asset. When you invest in physical gold, including coins and bullion, you need a safe place to keep it. If you prefer to manage the storage yourself, buy a strong, reliable safe for your gold. If you can’t store it on your premises, you can use a safe deposit box at a local bank or credit union. It’s also possible to pay for storage at facilities designed to store large amounts of gold. However, if you store your gold off-site, you have to be prepared to pay a fee, reducing your overall potential gains.
Should you invest in gold?
Many investors like gold because it has the potential to be a store of value when stocks crash or the economy tanks. As the Federal Reserve continues to provide stimulus to boost economic recovery in 2021, some investors are concerned about rising inflation and the stock market’s high valuation levels. If concerns of economic instability persist, gold prices may be on their way up, which could make the precious metal a safe-haven asset in which investors should keep a portion of their money.
Things to know before investing in gold:
— Gold stocks aren’t the same thing as physical gold.
— Gold’s relationship with the U.S. dollar.
— Physical gold is taxed at the collectibles rate.
— Gold doesn’t provide consistent returns.
— You might pay a premium when you buy gold.
— Gold bullion and gold coins are different.
— Gold certificates are vulnerable to scams.
— You need a safe place to store physical gold.
More from U.S. News
Update 05/25/21: This story was published at an earlier date and has been updated with new information.