As inflation fears increase, investors may turn to gold.
For thousands of years, humans have viewed gold as an investment and store of value. When the economy is questionable or the stock market is volatile, many investors start to ask, “Is gold a good investment?” And “Should I invest in gold?” If you are thinking about gold today, check your long-term investment goals and strategy and make sure that the precious metal fits well in your portfolio. Not only is gold known to diversify the portfolio, but with inflation fears on the rise, investors tend to look to gold as it is seen as a good hedge against rising prices. Before investing in gold, it is important to understand how gold works. Like any investment, you run the risk of loss and that risk is magnified if you don’t know the facts. If you are interested in gold, here are a few things to keep in mind.
Gold stocks are not the same as physical gold.
Some investors like to invest in gold stocks because they provide exposure to gold. However, it is important to note that you are actually investing in stocks and not real physical gold. You could invest in a gold mining company focused on producing gold, such as FrancoNevada Corp. (symbol: FNV), Newmont Corp. (NEM), or Barrick Gold Corp. (GOLD), but you are not actually investing in gold. If you like the idea of adding exposure to gold but don’t want to buy physical commodities, gold stocks may be a good choice. Depending on the situation, gold stocks could turn around and lose value when the rest of the market is down. While this is not always the case, these scenarios are worth considering when deciding if gold is a good investment for you.
The relationship of gold to the US dollar.
Gold and the dollar tend to have an inverse relationship, which means that their prices move in different directions. For this reason, gold can be seen as a hedge against the dollar and other fiat currencies, says Juan Carlos Artigas, head of research at the World Gold Council. “A weaker dollar is generally in favor of gold and vice versa,” says Artigas, but acknowledges that there are exceptions. “In times of systemic risk, gold and the dollar tend to be used as safe havens and can move in the same direction.” While gold can be a good choice for your investment portfolio, like any investment, it is affected by perceived value and may not always perform the way you think it is.
Physical gold is taxed at the collector’s rate.
Investors have different ways of gaining exposure to gold, says David Keller, chief market strategist at StockCharts.com. They range from physical gold to exchange-traded funds or closed-end funds to gold mining stocks. One of the advantages of investing in gold is the possibility of benefiting from a favorable tax rate. Long-term capital gains are often taxed at a rate lower than the marginal rate. However, this rate does not apply to physical gold. If you sell bullion or gold coins, you will be taxed at the rate on capital gains received. This is your marginal tax rate. For long-term businesses, this is your marginal tax rate, capped at 28%. Whatever your situation, you need to know the tax rate and prepare yourself accordingly if you decide to sell some of your gold.
Gold does not provide consistent returns.
While there are several notable advantages to investing in gold, there is one particular disadvantage. Gold does not provide constant income for investors. While publicly traded companies produce goods and services that consumers find valuable, gold has no production. Michael Reynolds, vice president of investment strategy at Glenmede, calls it “a serious structural disadvantage compared to other asset classes”. While stocks pay dividends to investors and bonds produce interest payments, “gold does not spontaneously generate more gold,” he says. On the contrary, you profit from gold when its price increases. “Gold derives 100% of its returns from the movement of its price, which can and has led to long periods of underperformance,” says Reynolds.