Gold is often viewed as a safety net to protect investors from currency meltdowns. This perspective reasons that paper cash may lose its value, but gold will always be the “gold standard!” You may not agree – I sure don’t – but many feel that this precious metal belongs in their portfolios. My job is to help you think through the investments you want to own and then acquire those investments in the best possible manner.
Gold is deemed a “collectible” by the Internal Revenue Service. Unlike stocks which are taxed at more favorable capital gains rates, gold is taxed as a collectible at 28%. Today’s capital gains rates – applicable to stock investments held for longer than 12 months before selling – could be as low as low as 0% or up to 32%. Not so for gold.
One way of addressing this tax conundrum is to buy gold in an exchange traded fund within your IRA. IRA’s are not taxed for capital gains rates and thus gold is treated like any other IRA asset purchase. Every asset in your IRA is taxed the same way. And all money withdrawn from an IRA either for retirement or to comply with Required Minimum Distributions is taxed as ordinary income at your marginal rate.
Examining gold and identifying an appropriate purchase price is as difficult as correctly valuing a stock that has no earnings. While a company may eventually be worth something based on capital investment and business development, gold doesn’t change – it will always be gold. The price for an ounce of gold is based on a notion of future scarcity with investors fearing inflation will erode the purchasing power of their currency.
Gold is shiny and fun to examine but I will always question the value of any metal if the financial markets truly unwind. People might trade things to eat for whiskey and cigarettes, but would they trade their last meal for gold? I just don’t see that as a viable choice.
Gold is regarded as a hedge against inflation. But analysts like James Montier of GMO think differently, noting, “Gold is often held up as an inflation hedge. However, the data provides a challenge to this view. The data shows the decade-by-decade average inflation rate and the real return to holding gold over the same decade. It doesn’t make pretty viewing for those who believe gold is an inflation hedge. That perception is down to one decade (the 1970s) when it held that inflation and gold were positively correlated. The rest of the time there isn’t a good relationship between gold and inflation.”
As professional asset managers there are times where we have bought gold – and in certain situations, we could purchase it again – but not as a hedge against inflation. We buy gold when we believe the risk to reward relationship is greater in that asset compared to another. Ultimately we prefer businesses that pay dividends and have business models. However, if you are buying gold, conduct the purchase in the optimal tax situation.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.