Gold is simply a store of value. It doesn’t have underlying fundamentals (that can be researched and that a subsequent investment can be based on) like the stocks and bonds of companies that trade on the stock market. And it doesn’t pay dividends or interest like stocks and bonds do. It really comes down to speculating on higher prices.
In addition, gold is expensive to invest in (and I’m not talking about its $1200/ounce price). If a guy wants to purchase actual gold
(bars or coins), he’ll also incur:
--About an 8% markup over the current spot price of gold just to buy a gold coin (American Gold Eagle, for example)
--Shipping/transportation costs to obtain the gold
--Storage costs (unless he has a very big gun or a really mean dog it’s probably not smart for him to actually keep the gold in his hall closet)
--If he actually does take possession he may even have to pay to reauthenticate the gold in order to sell it later
--Insurance costs (no matter where it’s stored)
It gets worse. Gold is taxed as a collectible. No matter what form he owns it in (coins, bars, Exchange Traded Fund (ETF) shares) the long-term capital gains tax rate is 28% on gold, compared with 15% currently on other long-term assets. Taking into account all these potential costs and the big tax bite, it’s easy to see that he needs some large-size returns on his gold investment to make it pay off.
Again, I’m not saying you can’t make money investing speculating in gold, I’m just saying it’s a very volatile, very risky investment and you should know what you’re getting into. As long as you know exactly when to get in and when to get out of the gold market you can make a ton of money (heh, heh)!
And I know last time I mentioned I’d share some TIPS (hint) about a better way to hedge against inflation... I promise I’ll cover that in a future musing.