Before purchasing gold, identify the specific gap in your financial picture that it would fill. For instance, does your portfolio lack diversification, need an inflation hedge, or simply be a tangible asset that gives you peace of mind?
Gold Needs a Defined Role
Gold (see here) has been a store of value for a long time. It has no earnings, dividends, or interest income, so its worth is entirely dependent on demand and scarcity. There are times when the market price of gold soars, stagnates for a long time, or decreases while income-producing assets are paying well.
This is why it makes sense to consider a gold investment as one part of a larger financial picture. Its long-term value is often thought to hold up better than other types of investments, and in some cases it can have a low correlation to other investments. But that means gold is not a substitute for a savings account, a debt-free lifestyle, or an appropriate and diversified portfolio.
Understanding this could help you avoid being swayed by fear. If you don’t have a defined purpose for a gold investment, don’t invest in gold.
The Main Ways to Own Gold
- Coins and bars. This option means you don’t need to rely on middlemen. But you need to know where you are storing your coins and bars securely, and if necessary, insure them. When it comes time to sell, you will need to understand how the process works. You need to consider the pros and cons of buying smaller coins that let you sell a portion versus larger bars. These have more cost-efficiency but less liquidity. Also know the premiums, costs, and how dealers determine the value when they sell.
- Exchange-traded products. This lets you have a form of gold in your investment portfolio, which makes it easy to buy and sell through a standard brokerage account. No storage or shipping to worry about. But understand that you’re investing in shares in the product and not an actual gold investment.
- Retirement account. You can buy tax-advantaged gold through a special type of account that can include coins, bars, and other bullion. But these accounts must comply with specific purity rules. You must use an approved trustee to hold the coins, bars, or other bullion and keep them in a depository you can access in retirement.
If you do own a physical gold investment, you may not need all your coins or bars in the same place. For instance, you may choose to store some of your coins or bars in a local bank’s safe deposit box and others in a private storage facility. This is important to know because some types of accounts don’t allow this flexibility.
What Does Gold Really Cost?
Don’t focus just on the spot price of gold when investing. Instead, consider the total cost of your investment, as highlighted by Yahoo. This is only part of the cost. Total gold cost includes the premium to buy, as well as storage and insurance costs, and potentially account and administration fees. It also includes shipping costs and fees. You need to compare the cost of your investment options to determine the best value.
Know what you will receive when selling and compare the premiums paid to the dealer. Some gold dealers advertise the price they would buy the gold back from you at. But the price is based on the current market price and is determined by each dealer. The better your understanding of the bid-ask spread, the easier it will be for you to compare the real costs of an investment.
Position Size Matters
Diversification is one of the cornerstones of investing. Gold should be weighed in terms of the role it will play in a diversified portfolio. Don’t allocate to gold when you should instead be focusing on filling more basic gaps in your financial planning, like an emergency fund or paying off high-interest consumer debt.
- Consider a reasonable amount. It makes more sense to have a well-rounded, diversified portfolio that may include a portion of gold than to have a large portion of your net worth tied up in gold.
- Watch out for concentrated risk. Gold doesn’t pay income, so the larger your gold holdings are relative to your total net worth, the more your finances would depend on the value of gold.
Be sure to educate yourself on any potential tax issues, since this can change your investment return. Depending on where you live, gold may be taxed differently than stock and fund gains, including being treated as a collectible. How you own the gold, and in what type of account, also impacts taxes and reporting.
If buying physical gold, be sure to keep a receipt, certificate of authenticity, photographs, and serial number log. These items may be important to verify the basis, substantiate insurance claims, and facilitate sale or estate administration. If acquiring a gold asset by gift or inheritance, make sure to get documentation of its fair market value and source.
Always be mindful of who pays if an item is lost in shipment; agree on delivery times and return policies.
Before paying out, establish the authenticity of the item you are purchasing. Reputable purchases will agree on an item’s purity, weight, and markings; the more checks and tests you can do, the less chance you run of obtaining a counterfeit.
Pressure Tactics Deserve Scrutiny
When the economy is shaky, inflation is rising and markets are unpredictable, gold advertisers may use exaggerated, fear-mongering promotions to sell gold investments. This can lead to decisions made without fully understanding your options and the pros and cons of each. Be wary of overly dramatic predictions of future gold prices or other investment returns. And don’t let fear of losing your wealth lead you to ignore the real and total cost of buying and owning gold.
If you’re pressured into believing gold is the one solution that could turn your financial situation around, walk away and revisit all your options. Make the choice fit your actual needs.
You don’t need to buy gold because you feel pressured by other people’s opinions, and you definitely don’t have to make the purchase right away. Do your research and make the purchase that fits your personal needs and preferences. You should be able to tell, in the first meeting with a dealer, if you’re confident they understand what you want and can provide the best fit for your investment needs.
