How to invest in gold and other precious metals
Precious metals, particularly gold, are considered safe havens that preserve and increase their value when other assets are struggling. For this reason, gold has even been something of a growth asset in recent years (though traditionally, it isn’t seen as one).
There is an undeniable attraction to owning gold as an alternative investment, especially as you can (if you wish) own the physical bullion yourself. So here’s what you need to know about this oldest form of investment.
How is gold priced?
The price of gold can rise or decrease based on what’s happening worldwide. Several factors drive gold prices, including supply, demand, interest rates, mining activity, and investor behavior.
Gold is strongly linked to the value of the US dollar – when currency is strong, investors trade in dollars, but when it is weak, they choose to trade in gold.
What affects the price of gold?
As a rule of thumb, gold prices rise when there is uncertainty or negativity in other areas of the market (such as equities and bonds or the economy in general). Conversely, it falls when growth is strong in those other areas. This relationship isn’t set in stone by any means, but broadly, it is why most gold investors hold this asset – to hedge against losses in other areas.
Other things that can raise gold prices include:
Consumption demand – are more people buying it for jewelry etc.?
Low-interest rates – gold prices often have a negative correlation to interest rates.
Weakening US dollar.
Low supply – if more gold is being recycled, prices go up.
Natural events, e.g., good monsoons, can raise gold prices as the affected countries invest more wealth and influence global prices.
Of course, the reverse of the above will tend to lower gold prices.
What is the difference between allocated and unallocated gold?
In a nutshell, allocated gold is solid bullion that someone owns. Owning allocated gold is the only way to properly own bullion and is independent of the price banks give it – meaning it is the ultimate safe investment. Of course, you might need to pay a little more for storage costs, but allocated gold is the truest way to invest in this commodity.
Unallocated gold is an imitation of gold investment. The gold remains in the property of the bank and is backed by a bank’s reserves, meaning that buyers of allocated gold are effectively investors in the bank and receive premiums in return. This is the most common form of gold investment worldwide.
What are the pros and cons of gold as an investment?
Gold, along with other precious metals, is also seen as resilient to inflation – able to preserve its relative value over hundreds and even thousands of years.
Historically, gold has provided an ‘economic lifeboat’ in countries where currencies and/or stock markets have collapsed. Provided that you can physically get the gold out of the country, you can preserve the wealth stored in it. But, of course, if the gold is held as an offshore investment, you won’t need to move it physically.
Another benefit of precious metals is that sometimes they can be held in the form of jewelry, so you get an ongoing benefit from them. But, of course, gold held as jewelry will need more insurance since it is less secure.
Compared to the stock market, gold is not an especially reliable source of growth. Though its price has trended upward more strongly in recent years, it still comes nowhere near the returns of equities. Instead, gold is considered a low-risk, safe haven investment.
In short: you don’t buy gold necessarily because you want to gain money. Instead, you buy gold because you don’t want to lose it.
Is gold a good investment?
If your goal is to grow your money, this type of investment is unlikely to be the right strategy, especially if you are new to the market. Unlike other asset classes like property or shares, you won’t earn any income from rent or dividends. And although the risk profile of precious metals is low, stock prices are volatile, so you stand to lose out if you buy or sell at the wrong time.
Precious metals do, however, tend to hold their value in the long term. For this reason, people tend to use them to diversify their portfolios as a hedge against short-term economic downturns and political uncertainty.
Do you pay Capital Gains Tax on gold?
According to the IRS, physical holdings in precious metals, including gold, are considered to be capital assets specifically classified as collectibles. Thereby they are subject to capital gains tax.
Capital gains tax is only owed after the sale of such holdings and if the holdings were held for more than one year. However, for these collectibles, the tax is at a higher rate. The IRS website states, “Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.”
How can I invest in gold?
There are many ways to invest in gold, some of which are relatively accessible with smaller amounts of cash. Here’s a run-through of the most common options:
Physical gold bullion
If you have considerable money to invest, you could buy physical gold bullion, coins, or jewelry. Online dealers such as APMEX or JM Bullion, brokers, and local dealers or collectors sell precious metals. However, you must go through a reputable source to ensure what you’re buying is genuine.
Another key consideration with physical gold is storage. One of the biggest risks of going down this route is that if you don’t protect your investment, this gold can be physically taken from you. To overcome this, you’ll need to factor in the costs of the storage facility and insurance. Alternatively, you could pay a dealer to store it for you, but this will also be costly.
Gold exchange-traded funds (EFTs) are a popular way for beginners to invest in gold. Several ETFs offer exposure to the investment method, including investing in a physical gold EFT and investing in a gold mining EFT.
A physical gold EFT allows you to invest in an EFT that owns gold. It tracks the commodity for you. If the gold rises, you make money. If it falls, you lose money. Three of the largest ETFs include SPDR Gold Shares (GLD), iShares Gold Trust (IAU), and Physical Gold Shares ETF (SGOL).
With EFTs that own gold mining stock, you will get exposure to the biggest gold miners in the market. The larger funds in this sector include VanEck Gold Miners ETF (GDX), VanEck Junior Gold Miners ETF (GDXJ), and iShares MSCI Global Gold Miners ETF (RING).
One of the biggest benefits of owning an ETF over bullion is that you can easily exchange it for cash at the market price. Instead of physically taking your bullion to a sale, you can trade the fund any day the market is open, similar to selling a stock.
You may be interested in a gold IRA if you want to diversify your retirement portfolio.
A gold IRA is a specialized retirement account that allows you to hold physical gold and precious metals. This IRA must be held separately from your traditional retirement account; however, rules around contribution limits and distributions remain the same. Gold IRAs are also subject to specific rules and federal regulations.
The IRS considers gold to be collectibles and generally discourages collectibles in IRAs. However, the IRS provides the following note: "There is an exception for certain highly refined bullion provided it is in the physical possession of a bank or an IRS-approved nonbank trustee. This rule also applies to an indirect acquisition, such as having an IRA-owned Limited Liability Company (LLC) buy the bullion."
With gold futures, the buyer and seller enter into a legal contract to exchange and deliver a specific amount of gold at a predetermined price and date, regardless of market conditions.
Gold futures rely on much speculation, making it a particularly risky investment for beginners. However, for those who are savvy about it and invest at the right time, gold futures could allow you to own a lot of gold for a relatively small amount of money.
Before investing in gold future, it’s essential to consider all the risks involved. Better still, speak with a financial advisor before investing.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.