With inflation being persistent and recent regional banking crises sweeping through our economy, investors have become more defensive with their capital. They are buying cash-flowing dividend stocks / ETFs, money market funds and investing in gold to manage near-term risk and volatility. In this post, we review the most common questions and answers for beginners when investing in physical gold.
1. How much physical gold should you buy?
Generally, financial professionals recommend holding 1-10% when investing in gold as part of a broader diversified portfolio strategy.
They do not recommend holding a higher percentage because of the following:
- Limited Growth Potential: Historically, gold may have limited growth since, unlike stocks or other assets, it does not produce any income or interest. However, gold prices tend to increase during periods of economic uncertainty or inflation.
- Lack of Diversification: If investors buy too much gold, they may be exposed to concentration risk and it may negatively impact portfolio returns. A diverse portfolio can help minimize risks and maximize returns.
- High Costs: Buying gold can be pricey given the cost of purchasing and storing the metal. In addition, gold is a relatively illiquid asset, making it challenging to sell it fast when necessary.
- Lack of Income: Since physical gold does not produce any income, investors must rely exclusively on price growth to produce returns. As a result, it could be challenging to earn a consistent income or meet long-term financial objectives, like retiring.
According to a recent analysis by Quantpedia, the study discovered that the average gold exposure was ~2% among institutional investors. Their gold position increased and decreased depending on stock market cycles. Institutional portfolios with gold generally outperformed during stock market downtrends / bear markets (e.g., 2008 financial crisis, Eurozone sovereign debt crisis in 2011, Brexit referendum 2016). Other recent wealth insights from Tiger 21’s 2022 Q4 asset allocation report or Knight Frank’s 2023 survey suggest that ultra-high net worth individuals typically allocate ~1% and 3% to gold.
2. What are the different types of gold?
Investors can purchase physical gold in the following three forms: gold bullion (e.g., bars), gold coins or gold jewelry. This is different from gold ETFs because a gold ETF is an investment in a fund that seeks to mirror the price of gold.
The three forms of physical gold include:
- Gold bullion: You can typically buy gold bars in one or 10-ounce bars. Bars come in amounts between one gram (approximately 1/31 of an ounce) and 400 ounces. They have a lower markup because there’s no minting involved. Wealthy investors buy larger bars when they don’t want to hold a large number of coins.
- Gold coins: Gold coins are easier to store than bullion. You can buy coins that are one ounce or less and coins have the advantage of being both recognizable and portable, making them easier to sell. The most common coins are the American Eagle, Canadian Maple Leaf, and South African Krugerrand. They’re available in one-tenth, one-quarter, one-half, and one-ounce coins. However, the lower denominations cost more on a per-ounce basis, therefore, it’s always better to buy one-ounce coins. Finally, beware of numismatic / collectible coins. Most of the time, there is a high premium in the acquisition cost vs. the spot price.
- Gold jewelry: Most people purchase gold jewelry for its beauty, not as an investment. Gold investors view this as a poor investment because of the high premium you pay to acquire each piece due to craftsmanship, refining costs, etc. vs. the spot price. Additionally, the re-sell value of the gold jewelry generally trades below the spot price because you would likely have to sell it to a refiner.
When acquiring gold, you also want to strive for the highest purity possible. Purity is calculated based on carats with 24-carats being ~100% and 22-carats being ~91.7% pure gold. Keep in mind that the lower the purity, the lower the value of gold. Finally, dealers usually charge a 5-8% markup over the spot price and its important not to overpay.
3. Where can you safely buy gold?
Unlike investing in the stock market, the two primary channels for purchasing gold include online bullion exchange platforms or in-person at a local broker / dealer.
- Online bullion exchange: Purchase physical gold pieces and other precious metals (e.g., silver) via a highly reputable online dealer such as JMBullion.com or American Precious Metals Exchange (APMEX). These dealers are often the most trusted places to purchase gold because of their comprehensive range of pieces, reputation, reasonable prices, customer experience and ability to process and ship orders quickly and discreetly.
- Local broker/dealer: Purchase gold through local shops or well-established national dealers that handle all types of precious metals. You can either take possession of the gold yourself or have them stored by the dealer. If you choose to have them stored, you’ll pay both storage fees and insurance on an annual basis.
Always, shop around across online exchanges and local dealers so that you can capture the best prices relative to the current spot price to ensure that you are not paying more than you need.
4. How do you store it after purchasing it?
Investors typically store physical gold in dry places onsite (e.g., safety deposit box at home) or offsite in a secure vault which is managed by a professional 3rd party.
Storing gold either onsite vs. off-site by a 3rd party requires evaluating a set of complex cost and security decisions. For example:
- If you store your gold onsite, where do you keep it?
- Do you have a big safe at home where you can stash your collection of gold coins or bars?
- How do you protect it from potential theft?
Alternatively, you might not have the means to store the gold yourself. Some people prefer to use pooled accounts to store their physical gold. Your gold is in a vault, and you have either a numbered bar or coin specifically yours (allocated), or you have a record of a sum of gold (unallocated) assigned to you.
- In the case of an allocated account, you usually have to pay a storage fee and an insurance fee.
- With an unallocated account, you don’t have to pay as many fees, but the gold might remain in the name of the company, putting you at risk if the company goes out of business and creditors get the gold.
As you decide which option is best for you, it’s important to weigh these considerations. New investors with very little gold have stored it in safety deposit boxes in the privacy of their own home. Whereas, professional investors with larger amounts of gold may store it in off-site locations.
5. How do you sell your gold in the future?
To sell your gold, it’s best to sell to a professional bullion dealer or through a reputable local dealer/coin shop.
Selling gold via peer-to-peer websites is a terrible option because of the risk of scams. Additionally, selling via an online auction site (e.g., eBay) is also a poor option because it results in hefty transaction fees reducing the final sale price by potentially more than 10%.
Once you’ve chosen how to sell, the next consideration is the selling price vs. the current spot price of gold. You’ll want to shop around and acquire quotes from dealers. The quoted price by dealers could vary broadly based on the type and amount of physical gold. Ideally, they would buy your gold at or near the spot price.
Finally, when selling physical gold, you’ll need to consider taxes. The IRS classifies gold and other precious metals as collectibles which are taxed at a 28% long-term capital gains rate.
During times of economic uncertainty and bear markets, we’re planning to acquire a small percentage of gold to our portfolio. We hope the answers to the five most common questions above will help if you are considering buying physical gold.
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