During times of economic uncertainty investors invariably turn to gold to help protect their assets. But how safe is investing in gold? Promoters of precious metals tout it as a hedge against inflation and global currency debasement. They almost always promote the history of gold as a medium of exchange and often claim that gold will never be worthless. While there is a grain of truth in each claim, what they fail to mention are the risks inherent to investing in gold
When an investor first moves to acquire a position in precious metals they look for places to buy gold. Most private investors choose to invest directly in the metal itself which means that they are looking to purchase bars or coins from a dealer. With the purchase comes the first investment cost. Unlike brokerages that will charge set fees of a few dollars per trade or commissions in the single digits, gold dealers typically mark up their products five to ten percent above current spot prices. In order for the investor to just break even they have to hope that the spot price rises far enough to make up the difference.
The commission that really hits the precious metal investor, however, is encountered during selling. If you sell to a reputable dealer such as a coin shop or metal market broker you can expect to receive ten to twenty percent less than the current spot price. If you decide to sell at a pawnshop or at a “Cash for Gold” location you can expect to receive forty to sixty percent less than spot. On average, a precious metal investor can expect purchasing and selling fees to add up to around forty or fifty percent of the value of their metal. In order to break even just on commissions an investor has to see a gain matching those percentages in spot price.
Many private investors don’t take into account the cost of storing their gold. Banks vaults are probably one of the most cost effective ways of storing your investment. Fees for safety deposit boxes usually start around $45 per year. Safes in the home are another good way to store your gold. Fireproof safes are recommended because gold can be damaged in a home fire and will be worth considerably less than undamaged bars or coins. Fireproof safes can range in value from $20 on up to well over $10,000. Also, if you choose to keep your gold in your home, insurance companies will generally require an increase in coverage, effectively causing you to pay a monthly fee for the storage of your investment.
Taxes on capital gains made in the metals markets are generally about the same as other investments. Unfortunately, in the United States gold coins are considered collectables and any capital gains made on collectables are taxed at around twenty-eight percent. This is compared to the lower tax rate on other investment options such as stocks, real estate, or savings bonds.
Market Swings/Price Fluctuation
As with most investments, the gold market is subject to swings based on market demand. If you had purchased gold in the mid 1990’s when it was about $280 per ounce and sold in 2012 when it was around $1700 an ounce you would have made a very nice profit. If, however, you had purchased gold during the oil crisis in 1979 at $750 an ounce and sold in 1981 at $350 an ounce you would have lost quite a bit of money.
The gold market is just as volatile as any other market. It has up-swings and down-swings that are based on global events outside of the control of investors. Sometimes it will work great as a hedge against inflation, other times it won’t even match it. A great example is from the year of 1980 when the price of gold was in decline but inflation rates were nearing all time highs of over fourteen percent.
The current spot price of gold is more closely in tune with investor speculation than anything else. While gold has some use in the jewelry industry and has a smaller market in the electronics industry, it isn’t useful for much else. If the demand for gold increases, it is almost always due to investors seeking to buy more gold rather than actual consumption of the metal.
Many market analysts and unscrupulous gold promoters have been predicting gold values of over $10,000 or even $20,000 an ounce. The fact that these figures neglect is that society can always produce more gold. Miners and geologists know where there are vast reserves of gold on every continent. The trouble is that until prices rise far enough to make mining these deposits profitable, the gold will remain in the ground. However, with every rise in spot price more mines become profitable to operate thus increasing the supply and decreasing the demand.
So What Should the Private Investor Do?
The above information is not provided to scare the gold investor, but simply to inform them of the risks inherent in owning gold. All investments have risks; stocks, real estate, and even United States Savings Bonds. The wise investor understands the risks of each investment class and hedges against such risks by diversifying their investments across many different areas.
For further reading on private investment the author suggests the article: The Difference Between Stocks and Commodities as Investments.