Gold is considered by many, to be the best investment you can make to protect yourself during stock market declines and inflation. In fact, history shows that the performance of gold goes up in times of high inflation. However, the price of gold also has its highs and lows and you could just as easily lose money investing in gold as with any other investment.
The Internal Revenue System classifies gold as a collectible and the tax rate for long term capital gains is 28 percent. Since there are no dividend or interest payments made, gold investors are dependent on rising market prices for positive returns.
Types Of Investments In Gold
Gold can be bought in many different ways – gold bullions, gold coins, gold mutual funds, gold mining stocks, gold futures and gold options.
Gold bullions, also known as bars, are generally bought and sold through brokers and gold dealers. They are traded at a price that is above the market price. Once purchased, the bars are usually kept in the custody of the broker or the dealer and you pay for the storage and insurance fees. The dealer will also give you a numbered certificate where the numbers match those of the gold bars you’ve bought. When you sell the bars, you must provide the certificate to prove their authenticity and identity.
Gold coins are easier to store than gold bars. Though they trade at the same price as gold bars, they are considered to be more cost effective, as you don’t have to pay storage or insurance fees. There are two things to consider when buying gold coins – their numismatic value and the gold content. The former refers to the value of the coins as a collector’s item. The second refers to the amount of gold that has gone into the making of the coin. The higher the gold amount, the more valuable it is.
Instead of buying gold, you could invest in gold mining companies. Bear in mind that the stocks of gold mining companies don’t always follow the trend of gold prices. But over the long term, any short term volatility of stock prices settle down to follow the gold prices in the market. If you want to invest in gold mining stock, try and find companies that have been mining for a long time and have low extraction costs.
Gold mutual funds and gold exchange-traded funds (ETF) are another way to invest in gold. As with any mutual fund, gold mutual funds offer a diversified portfolio of gold mining stocks. Look for a fund that has a low expense ratio. Gold ETF’s allow you to own gold bullions without the added hassles of storage and insurance. Many ETF shares are traded on the major stock exchanges.
Gold futures contracts and gold options can be used to insure already owned gold investments or speculate on future gold prices. In the case of futures contracts, you get quite a lot of leverage and you could make huge profits on your investment. But with the volatility of gold prices, you could also sustain huge losses with the futures contracts.