How to Own

and Invest in Gold

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Why Gold?
In the Beginning
Imagine it’s around 3500 B.C. on the banks of the Nile River. You’re
fishing, perhaps, when you stub your toe on a particularly hard rock
embedded in the silt. You stoop to pick it up, and it gleams like something
you’ve never seen before.
You’ve discovered gold.
From that early discovery, the ancient Egyptians were drawn to gold for
the same reason many are today: It’s not only beautiful, but it’s one of the
easiest metals to work with, easily alloyed with other metals. It never rusts
or corrodes, making it ideally suited for fashioning into ornamental objects
or coins.
It’s also incredibly rare. All of the gold ever pulled out of the ground
would fit in a 65-foot cube. That includes all of the “easy” gold that came out
of California rivers and South African surface mines. Every ounce of new
gold that comes onto the market is harder and more expensive to mine than
the last.
All of these factors—durability, rarity, and physical appearance—have led
society to value gold for millennia. Because it can’t be easily counterfeited,
gold was the near-universal currency throughout the world until the modern
era, and it backed the U.S. dollar.
That changed in the wake of the Great Depression. Responding to the
work of economist John Maynard Keynes, the German, British, and U.S.
governments abandoned the explicit ties of their respective currencies to
gold. In the U.S., where fear about the economy during the Depression
caused massive gold hoarding, the private ownership of gold actually
became illegal in 1933 and remained restricted until the 1970s. This use of
gold as currency—and the confiscation of private gold in the 20th century—
underlies many investors’ attitudes toward gold to this day.

HOW TO OWN AND INVEST IN GOLD • 1

The Modern Era: Why Gold Now?
Since gold is no longer the primary or even common way of conducting
real-world economic transactions, perhaps the most important question any
investor needs to ask is a simple one: Why own it? Only by answering that
question can you make an informed decision about the best way to use your
investment dollar.
For a modern investor, the case for owning gold can be broken down into
a few factors:

1. A “just in case” store of wealth. Many investors believe that physically

owning gold in an accessible form is a prudent strategy in preparing for
unlikely—but not impossible—events in the global and local economy.
Whether it’s distrust of the U.S. economic and political system, concern
about external disruptions to the modern electronic economy from war or
disease, or even global warming, history would suggest that no matter what
happens to the value of a paper dollar bill, an actual physical gold coin will
likely retain economic and transactional value.
Often you’ll hear this argument referred to as the “guns and butter”
argument for gold. If you’re really worried about the state of the world, it
makes sense to go back to the basics, and gold has been the most basic store
of wealth in recorded history.

2. An inflation and currency hedge. Many investors are also drawn to gold
because there is ample evidence that over a long enough time, gold can retain
value relative to physical goods, whereas fiat currency such as the dollar rises
and falls. A common axiom is that “an ounce of gold has always bought
a man’s suit,” and there’s some truth to that. According to Casey Research
(caseyresearch.com), in the Roman Empire, an ounce of gold purchased a
toga, a belt, and a pair of sandals. With gold at $1,500 an ounce, a modern
gentleman can be attired in the style of the times. In 400 B.C., an ounce of
gold bought about 350 loaves of bread. At roughly $4 a loaf, that formula
still holds true.
Over short periods of time, however, there’s no guarantee that gold will
rise and fall with inflation. In fact, since the 1970s, the price of gold has been
far more volatile than the actual rise of consumer prices.
Similarly, when considering the value of gold in relation to other goods,
many investors look at the long-term relationship between gold and oil for
guidance.

2 • HOW TO OWN AND INVEST IN GOLD

 2,000
Price of gold (dollars per once)
CPI (Index, 1982-1984=100)
1,500

1,000

500

0
1976 1981 1986 1991 1996 2001 2006 2011 2016
Note: Shaded areas denote recessions.
Sources: Bureau of Labor Statistics, CME Group (FactSet).

Chart 1. Over 40 years, gold prices have varied widely

from consumer price changes.

Barrels of crude oil per ounce of gold

40

30

20

10

0
1976 1981 1986 1991 1996 2001 2006 2011 2016
Note: Shaded areas denote recessions.
Sources: CME Group, ICE - Intercontinental Exchange (FactSet).

Chart 2. Gold and crude oil prices also have a volatile relationship.

Any tight correlation between gold and oil broke as soon as the dollar
stopped being pegged to the price of gold in 1971. There are many periods
when gold is either “expensive” or “cheap” relative to a barrel of oil, compared
with the long-term historical average.
One thing that has held true, however, is that gold acts as a kind of
“inverse dollar” bet quite effectively. When the value of the dollar falls versus
other world currencies, the dollar price of gold goes up—that is, gold’s value
remains intact despite fluctuations in exchange rates.

HOW TO OWN AND INVEST IN GOLD • 3

 Index, 2006=100

300
Price of gold
U.S. dollar

200

100

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: Shaded area denotes recession.
Sources: CME Group, FactSet.

Chart 3. Gold prices and the dollar’s strength are inversely related.

Here, over even relatively short periods, we can see that when the dollar
strengthens, gold declines (as we saw in 2008 and 2014). When the dollar
weakens, the price of gold increases (2009, 2016). So if you’re looking for
a hedge against a rapid or persistent decline in the value of the dollar, gold
may make sense.
3. A non-correlated investment. Finally, many investors who aren’t worried
about the collapse of either the country or the economy look to gold as a
source of diversified returns in their portfolios. For this purpose, the results
are mixed. According to this theory, when stocks or other financial assets are
down, gold will be up, or at least its returns will be unpredictably correlated.
Here the jury is still out; gold can have periods of both high and highly
negative correlations with financial assets, and in fact, that correlation can
shift quite rapidly.
It’s important to recognize that as a portfolio asset, gold is very, very
different from every other asset you’re likely to own. Stocks have value
based on their assets and their future cash flows from participating in the
global economy. Bonds have value based on their credit worthiness and
their coupon payments. Commodities have value based on their worth in
industrial processes or as primary consumables like food.
Gold, on the other hand, has value because a large group of individuals,
central banks, and institutions choose to own it for one of the above reasons.
While about 10 percent to 15 percent of the gold that is mined each year is
used for industrial purposes, the vast majority is not “useful” in a traditional
sense. This means that as an investment, a decision to buy gold (in one of
the many forms discussed in this booklet) is a bet on the psychological
importance of now vs. the future.

4 • HOW TO OWN AND INVEST IN GOLD

 90-day correlation between gold and the Standard & Poor’s 500 index
1

-1
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Note: Shaded area denotes recession.

Sources: CME Group, Standard & Poor’s (FactSet).

Chart 4. The price of gold versus the price of stocks

Knowing Your Reasons

Perhaps the single most important factor in your success as a gold
investor is knowing why you’re buying gold in the first place. Understanding
that will help you navigate the often confusing world of gold ownership and
avoid potential pitfalls.

The Gold Market

Unlike most securities, physical gold doesn’t trade on one exchange—it
trades all over the place. If you want to buy an ounce of gold, you can likely
get it at a big-city bank branch, a jewelry dealer, a dedicated precious metals
seller, or even in a private transaction with another investor.
Of course, that’s not really how most gold changes hands. Most physical
gold trading actually happens in London.
The London Bullion Market Association (LBMA) is made up of large
trading firms, banks, and gold dealers who all agree to abide by the rules
the LBMA sets, and those rules are unique. All of the gold traded actually
sits in the vaults of seven large London banks. Trades are negotiated among
members for ownership of 400-ounce bars known as Good Delivery bars.
The LBMA clears the trades and simply adjusts the ownership records
showing which members own which serialized bars.
While market makers keep a continuous price all day, twice a day, at
10:30 a.m. and 3 p.m. London time, the 13 largest banks conduct an auction
to set a “fixing” price at which the banks all agree to buy or sell based on
their needs at that time. These a.m. and p.m. “fixes” are the anchor points

HOW TO OWN AND INVEST IN GOLD • 5

for gold pricing around the world, as the LBMA accounts for the transfer of
some 20 million ounces of gold in an average month, roughly 10 times the
amount of any other gold market.
When the London market closes, the price of gold globally is generally
pegged to the trading in gold futures—contracts for delivery of gold at a
future point in time—that trade on the COMEX futures exchange in New
York. Whichever contract is closest to today’s date and has the highest
volume is used as the “spot” price. Each contract in New York is for 100
ounces of gold.
During the night, when both the New York and London markets are
closed, other markets’ trading (electronic, Sydney, and Hong Kong) sets the
price, so there truly is a 24-hour live price for each ounce of gold.

Supply and Demand

If you’re wondering what determines the price of gold, it’s actually
simpler than you think. Like virtually all commodities—and most financial
assets—it comes down to supply and demand.
One of the reasons gold holds such attraction for many investors is that
its supply is limited. If there’s a predictable demand for, say, corn, a farmer
can choose to plow under his soybeans and grow more corn. If there’s
tremendous demand for Microsoft stock, Microsoft can simply choose to
issue more shares. And if people keep buying 10-year Treasury bills and at
low interest rates, well, the Treasury will just keep making more bonds to
auction off.
Gold, however, can ultimately only come out of the ground. According to
the World Gold Council, as of the end of 2015, just 186,700 tonnes (metric
tons) of gold existed above ground. Each year, gold miners around the world
add about 3,000 tonnes to that total, and the cost to get that gold continues
to climb, year after year, as gold deposits are deeper, less pure, and more
dangerous to access. Due to consistently high demand, the gold recycling
industry contributes about another 1,000 tonnes per year to the supply from
old jewelry, computers, and knick-knacks being re-smelted.
Most of that “new gold” is made into jewelry, with a little bit being
identified as net demand from central bankers, exchange-traded funds, and
newly minted gold coins and bars.
In any given year, supply and demand have to, by definition, exactly
match. All other gold trading that happens is between existing owners of
already mined gold. If people want to buy more bars, coins, or jewelry than
the miners and recyclers can produce, the price will keep climbing until
someone is willing to sell.

6 • HOW TO OWN AND INVEST IN GOLD

 Percent
100 Gold supply Gold Demand
Central bank and other institutions
Recycled
80 Bar and coin

Technology
Total mine supply
40

Jewelry

0
Exchange-traded funds

-25
Source: World Gold Council, 2015.

Chart 5. Gold supply is limited, so increased demand can raise prices.

It’s a familiar refrain for gold investors. Over the long term, the con-
strained supply is on your side. In the short term, vagaries of psychology
can create significant price swings.
This limited nature of supply makes gold highly susceptible to investor
psychology. In many countries (notably India), gold jewelry is given as a gift
not so much to wear, but for investment purposes—a sizable gold jewelry
collection is seen as an asset that can be sold in hard times. If the price is too
high or the economy is bad, jewelry demand can plummet. The same is true
of essentially all of the sources of demand other than technology.
Central banks hold an interesting position in this mix. Historically, the
world’s governments have stockpiled enormous amounts of gold.
Despite the decline of the gold standard globally, the top five gold-
holding central banks still have enormous remaining stockpiles—over
31,000 tonnes as of the end of 2015, or over 16 percent of all the above-
ground gold on the planet, with a few countries owning the majority
of that.
Gold Holdings by Central Banks
Central bank Tonnes held (metric tons)
United States 8,133.5
Germany 3,381.0
IMF 2,814.0
Italy 2,451.8
France 2,435.7
Source: World Gold Council, May 2016

HOW TO OWN AND INVEST IN GOLD • 7

 Each of these top five central banks owns enough gold to swamp the
supply coming from gold miners in any given year. Because central banks
have such large positions and the potential to massively over-supply if they
choose to, over the past 100 years various multinational agreements have
bound signatories to selling their reserves only according to an agreed-
upon schedule, with an eye toward maintaining stability in gold’s price vs.
world currencies. These Central Bank Gold Agreements have been largely
successful, especially since the late 1990s, and they continue to this day.

Buying Gold: Physical

Once you’ve decided that gold has a place in your long-term financial
plan, you’ve actually just begun the decision process. How exactly are you
going to take ownership of your yellow metal?
Physical gold can be fabricated into virtually any shape and size, and a
vast amount of monetary wealth can be packed into a very small space—
that’s one of its main attractions. A carton of butter in your fridge weighs
a pound, or about 14.5 troy ounces—the universal measurement of gold. A
pound of gold fits into a cube less than an inch-and-a-half on a side—and
was worth almost $20,000 at 2016 prices.

Pick a Format
The most common way small investors buy physical gold is coinage.
Gold coins have been minted for thousands of years, and a modern gold
coin is different from a Roman one only in its purity and consistency. While
most people are familiar with the concept of “24-carat gold,” that jewelry
market unit is actually a very coarse way to measure purity. Twenty-four
carat gold is 99 percent pure. The next lowest grade—22-carat gold—is
about 91 percent pure.
Gold for investment is usually measured in “fineness” or parts per
thousand. So 24-carat gold would have a fineness of 990—10 parts per
thousand are some sort of alloy. Gold for investment can have a wide range
of fineness, and differences will affect the price. A 400-ounce London Good
Delivery bar used by banks has to have a minimum fineness of 995. The
popular one-ounce American Eagle gold coin produced by the U.S. Mint has
a fineness of just 916, as does the South African Krugerrand. A Canadian
Maple Leaf coin has a fineness of 999.9 parts out of 1000.
Does this make one better than the other? Not really. Each coin is minted
so that the content of pure gold is exactly one ounce. So while a Maple Leaf
weighs 31.110 grams on a scale, an American Eagle weighs 33.931 grams.

8 • HOW TO OWN AND INVEST IN GOLD

Different weights, but the same actual amount of elemental gold inside. In
any case, the act of taking gold and turning it into a coin or a small bar adds
some cost. The headline price of gold might be $1,200, but an American
Eagle coin might cost you $1,250. That fabrication cost means you generally
want to buy the largest possible single item. Where the American Eagle
might have a fabrication premium of 2 percent or so, a 10-ounce bar from
the Perth Mint might only have a 1 percent premium.
In general, the larger the individual coin or bar, the closer to the advertised
price of gold you’ll pay.

Pick a Vendor
Of course, you still need to actually acquire your coins or bars. Once
upon a time, you could go to your local bank and just buy gold. Now you
generally need to either go to a specialized coin dealer or the main branch
of a money-center bank. Increasingly, however, people take physical
delivery of gold by ordering it online. Websites such as JMBullion.com and
Kitco.com sell coins and bars and ship them right to your doorstep—
signature required, of course. Online vendors will actually ship you tens of
thousands of dollars of gold, completely insured. Like any other investment,
the purchase price will always be more than the price you get for selling gold
at the exact same moment—that’s the spread, and it’s just part of the cost of
doing business.

Pros and Cons

The primary pro of owning gold physically is that if you are buying gold as
a guns-and-butter asset, nothing stands between you and your investment.
Nobody is holding on to it for you. You don’t need access to a phone or a
computer or a car in order to get your hands on it. For many, being able to
literally put their hands on gold is important.
But physical ownership comes with its own risks, the largest being
storage, or vaulting. A physical coin kept in your house is subject to theft, so
some sort of security or a safe is prudent. Alternatively, you can store your
gold in a local safe deposit box, but then you’re at the mercy of the bank to
get access to it. You can even pay large bullion dealers to store your gold
in vaults from Canada to Asia to the Cayman Islands, with a promise to
deliver it to you on demand—but again, this makes getting actual hands-on
possession more difficult.
Each step in owning physical gold—the cost of fabrication, the spread
charged by the dealer, vaulting, security, and perhaps insurance—is an
expense. If you’re planning on holding on to coins essentially forever, this

HOW TO OWN AND INVEST IN GOLD • 9

may not matter. But if you’re interested in a potential increase in value, there
may be cheaper alternatives.

Buying Gold: Pooled Gold

If taking possession of physical gold seems risky, gold dealers have
created an easy solution for you to still own bullion: gold pools.
In a gold pool, run by all the major gold dealers, you buy a share of a
large pool of physical gold stored in the dealers’ vaults. That gold may be a
collection of London Good Delivery bars, coinage, and other easily traded
physical gold.
The idea of investing in a pool is hardly new—German and Swiss Banks
have issued gold-backed certificates to customers for hundreds of years,
and gold certificates can be seen as the precursor to modern paper money.
Currently, there’s only one government-run certificate program: the Perth
Mint certificates issued in Australia. Investors can buy certificates de-
nominated in ounces of gold, which represent an obligation by the mint to
deliver gold on demand or return a cash equivalent. In gold investor par-
lance, that’s known as an “unallocated” ownership, because there’s no vault
you can walk into and point to a specific pile of gold and say, “That’s mine.”
More modern gold pools don’t issue physical certificates. Instead, they
look a bit more like an online bank account. Investors deposit money with
the pooled gold program and purchase shares of a large pool of gold. These
programs can be considered “unallocated,” like the Perth program, or they
can be “allocated,” giving you legal ownership of a specific quantity of gold
actually held in a vault.
In both, you can use the pool system to sell your gold and receive cash,
or you can pay a fabrication fee and have your gold sent to you—say, $25
to take out an ounce as an American Eagle, or $2,000 to take a 400-ounce
London Good Delivery bar. Unallocated programs generally don’t charge
for insuring your gold because, being unallocated, the gold is not actually
yours; you’re just a creditor of the pool. Allocated programs often charge a
small fee to maintain insurance on your gold, costing around 0.10 percent
to 0.15 percent a year.

Pros and Cons

The main advantages of pooled programs are convenience and cost. An
unallocated gold account is generally the cheapest way to get access to gold,
usually with no insurance costs and no fabrication premiums, and bid-and-
ask prices that are very close to the advertised spot prices in New York or

10 • HOW TO OWN AND INVEST IN GOLD

London. Transactions can be very small or very large and can happen with
high frequency, and the only cost is the spread advertised by the dealer.
Allocated accounts often have commissions on transactions, ranging from
almost nothing to 0.50 percent.
In either case, it’s extremely important to do your homework before
investing in a pooled gold account. Each dealer has terms and conditions.
Some accounts are enormous, multi-billion-dollar pools used by institutions
and high net-worth individuals around the world, and some are smaller
upstarts with less of a track record.
The primary negative of pooled programs is that while you may have
legal ownership of your gold—or at least a claim on the unallocated
pool—you don’t actually have it in your possession. If you’re holding
gold as an emergency asset to be used during some future breakdown in
communications, commerce, or governance, gold vaulted in Zurich and
accessed through the internet may not be for you.

Buying Gold: Miners

Before the advent of exchange-traded funds, one of the most popular
ways for investors to participate in the gold market was to buy the shares of
gold mining companies. The theory is that gold-mining stocks will do well
when the price of gold rises, mirroring its price.
The idea has a lot of merit—after all, if a gold miner in Canada has a
fixed cost of $500 an ounce to get gold out of the ground, it will make more
money as pure profit if the price of gold rises from $1,250 an ounce to $1,500
an ounce. In fact, for decades many gold-miner investors have invested in
the belief that miners acted as a kind of leveraged bet on gold—precisely
because they were in such a windfall position should gold prices skyrocket.
There is something to that argument in the short term. Consider a 10-
year investment in gold itself vs. the NYSE Arca Gold Miners Index.
You can see that during short periods—such as the rapid decline in gold
in 2008 and the rapid increase in 2016—the gold-miners index moved far
more on a percentage basis than a simple investment in gold would. The
problem, unfortunately, is that gold miners are businesses just like any other,
so as an investor, you have to be correct not only about the movement in
the price of gold but in how those individual companies are run. A mining
company can be well or poorly run. It can have windfalls (say, from an
unexpected gold discovery) or mishaps (like a labor dispute).

H O W T O O W N A N D I N V E S T I N G O L D • 11
 Index, June 2, 2006=100
300
Price of gold
Price of gold miner stocks

200

100

0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Note: Shaded area denotes recession.
Sources: CME Group, NYSE (FactSet).

Chart 6. Stocks in gold mining companies have underperformed

investments in bullion over 10 years.

Complicating matters is that mining companies have over the years tried
to limit their exposure to the price of gold by using gold futures. Gold miners
use futures much like a farmer who sees a high price for corn and decides to
“pre-sell” his crop by promising to sell next year at today’s prices. How well
gold-mining CFOs manage these hedges can make a huge difference in the
long-term profitability of any individual miner.
The track record over the past decade hasn’t been great for gold miners—a
10-year investment in bullion has yielded a 94 percent return, while a 10-
year investment in miners has lost around 37 percent.

Pros and Cons

The main advantage of investing in miners is that it’s a way of making a
simultaneous bet on both an industry and a commodity. It takes the return
of gold and turns it into traditional equity returns, complete with rising and
falling prices and dividends. Gold-mining stocks are also easily traded, like
any stock, and there are numerous ETFs and mutual funds that can make
buying them as a group easier and more convenient.
The downside is simple: Buying a miner stock is not the same as buying
gold, any more than buying a farm is the same as buying milk. As an investor,
you actually combine the risks of gold investing with the risks of the global
equity markets.

12 • HOW TO OWN AND INVEST IN GOLD

Buying Gold: ETFs
If you’re buying gold as a portfolio asset alongside stocks, bonds, and
other investments, exchange-traded funds, or ETFs, provide an easy way to
access gold that picks up where pooled gold leaves off.
An exchange-traded fund that owns gold is structured as a “grantor
trust”—a legal structure where each shareholder has a unique claim on
a single pool of assets. When you own a share of a popular gold ETF like
the SPDR Gold Trust (Ticker: GLD), your share serves as a pro rata claim
on gold actually held in vaults (in this case, in London) and verified by an
independent auditor.
How you buy ETFs is different from buying pooled gold, however. With
pooled gold you buy from the pool itself, but with ETFs, you buy shares
from the market, just like you would a share of Microsoft or IBM. The price
of the ETF will fluctuate during normal trading hours, just like a stock, and
you’ll have a small spread between what you can buy a share for and what
you’ll sell it for, also like a stock. All day long, the stock exchange publishes
a fair-value estimate for each gold ETF, based on how gold itself is trading at
that point in time—a figure called the intraday net asset value, or iNAV. At
any point in time, you can look at the price of the ETF vs. that of the iNAV
to ensure you’re paying very close to the actual value per share of all the gold
in the vault for that ETF.
In other words, ETFs combine the liquidity and convenience of stock-
market access with the direct gold ownership of pooled gold. There are
currently four ETFs that directly invest in gold bullion, with expense ratios
ranging from 0.25 percent to 0.40 percent a year, making the costs very
competitive with other forms of gold ownership. With over $40 billion in
assets, gold ETFs are now used by some of the world’s largest hedge funds
and institutional investors to express their opinion on where gold is headed.

Pros and Cons

Most of the pros and cons of gold ETFs come from their presence on an
exchange. Like a stock, you can theoretically buy a single share, often for
less than $20. Like a stock, you can trade as often as you like, making an
ETF ideal for speculating on how gold may react to the news cycle. It can
be bought in any kind of brokerage account, including retirement accounts,
and can even be bought on margin or shorted just like any other stock.
On the flip side, in order to own an ETF, you have to have a brokerage
account, and you have to buy and sell it just like you would a stock. That

HOW TO OWN AND INVEST IN GOLD • 13

means paying a spread on the transaction and likely a commission to your
broker. These costs are generally still favorable compared with fabrication or
storage costs, but they’re not zero. It’s also important to realize that the price
of a gold ETF at any moment in time is determined by the buyers and sellers
in the marketplace—it’s not structurally pegged to the price of gold.
All ETFs—gold ETFs included—use the creation/redemption mechanism
to help keep the traded price of an ETF close to its true value. Large institu-
tions can deliver gold to the ETF in exchange for new shares or deliver shares
of the ETF in exchange for gold. If the price of the ETF deviates very much
from the fair-market value of the gold in the vault, they can buy or make new
shares to sell (profiting a little from “selling high”) or they can buy ETF shares
and deliver them to the fund in exchange for gold (profiting a little from “buy-
ing low”). Since there are multiple firms competing for that arbitrage, it’s rare
to see any ETF trade far from its true value.
But that’s not a guarantee—the purchase price is still ultimately the price
you’re willing to pay and that someone else is willing to sell for. For that
reason, just as with any other kind of market trading, placing an order that
can only be executed at a certain price or better (a limit order) is always the
best practice, and setting that price so it’s close to fair value by checking the
iNAV is a good idea as well.
Last, as with any non-physical ownership, gold ETFs don’t provide any
kind of safety net should you be unable to access your brokerage account.
Instead, they’re a way of participating, as an investor, in the daily price
fluctuations of gold in response to world events. (It’s worth noting that a
recent ETF entrant, the Van Eck Merk Gold Trust [OUNZ], allows investors
to trade their ETF shares for gold coins or bars for a fee.)

14 • HOW TO OWN AND INVEST IN GOLD

Conclusion—and a Word on Taxes
For most investors, owning gold will either be a guns-and-butter decision
or a portfolio decision.
As a practical matter, if you plan on using your gold reserve in actual
transactions during a time of significant crisis, the form in which you have
your gold matters a lot. It’s unlikely the local farmer has change for a London
gold bar, and he’s certainly not going to take the promise of your Toronto-
based gold account. For these reasons, most bullion holders buy smaller coin
denominations and are primarily concerned with storage, safety, and cost.
For portfolio investors, some form of pooled vehicle will likely be the
most cost efficient and convenient solution, sacrificing the hands-on nature
of owning coins and bars for the security of a central bank vault.
But in either case, there’s a final component that deserves special mention:
taxation.
From the perspective of the Internal Revenue Service, gold is a collectible.
It’s not considered a financial asset of any kind. The IRS makes no distinction
whether you own gold in coins, in a pool, or in an ETF. Gold is gold.
As a collectible, gold is taxed at a flat rate of 28 percent. Whether you
hold gold for a day or a decade, any gain on your purchase and sale of gold
will get 28 percent taken off the top. While this can be deferred by using an
IRA or other tax-deferred account to shelter the gains, investors may find
this a rather punitive amount.
By comparison, qualified dividends and long-term capital gains on
equities are currently capped at 20 percent for those in the highest (39.6
percent) tax bracket, and 15 percent for those in the 25 percent to 35 percent
bracket. Some investors choose to invest in gold miners precisely to avoid
these tax issues.

The More You Know …

It’s somewhat trite to say, “Know what you own, and know why you
own it,” when it comes to investing, but it’s perhaps more true for gold than
for stocks and bonds. The only way to be successful as a gold investor is to
know what you expect to achieve with your gold investing dollar. With a
solid understanding of that, you can take this guide as a first step—but not a
concluding one. As with any investment, read the fine print, do the research
to understand your true costs, and be skeptical of anything that seems too
good to be true.

HOW TO OWN AND INVEST IN GOLD • 15

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