01/01/2010

Toward the end of the Reagan presidency, a commercial aired showing an art deco stylized woman standing on top of a NY skyscraper with her arms stretched to the cosmos, her long hair waving away from her beautiful and transfixed face. Gold bangles dropped from the sky onto her shapely outstretched arms. The voiceover said, “Gold – buy it for yourself.” I thought, Wow, we have just lived through a paradigm shift. That year at Christmas, my mother gave my father a gold Krugerrand. And again, I said Wow. I wish I had bought a gold Krugerrand (or several) for myself that year and every year after that.

Whenever the world is in political crisis and economic shambles, investors turn to gold. It is selling at over $1000 per ounce these days and like all commodities, its price is dictated by supply and demand. I took a quick look at the US Mint’s web site just now and it has ceased minting and selling new American Eagles apparently because demand is so high that supply cannot keep pace. Interesting. Does that make you want it even more?

If you are thinking that it might be wise to diversify your portfolio in 2010 with gold (and who isn’t?), do your homework, read, talk to your financial advisors and ask a lot of questions. Here are a few things to consider:

• The “Real Deal.” You can buy gold to hold in your hands in the form of jewelry (pretty risky IMHO), coins or bars. There are numismatic coins – collectibles whose value exceeds metallic content (so, how do you value them? Very good question) as well as bullion coins – those minted by countries and valued by weight and metal content. You can also buy bullion bars, but probably the easiest and least problematic are the bullion coins. Apparently, you can only buy American Eagles on the secondary market these days, so proceed with caution. Make sure that whoever you are buying from has a long and very good reputation. Keep in mind, too, that selling gold is not always easy. You usually must sell at a discount.

• Exchange-Traded Funds. A company owns gold and sells you shares of the company—so you own a percentage of the company’s assets (gold) but you don’t have to deal with the problems of physical possession of the gold. Like storing it, protecting it or selling it.

• Gold Futures. Volatile and sophisticated. In my opinion, a good way to lose a lot of money faster than in slot machines…unless you are really really knowledgeable and not faint of heart.

• Stocks. Primarily publicly traded gold mining companies. Research on Motley Fool or MSN or other financial site.

• Mutual Funds. Especially for retirement accounts, this is a way to diversify the risk by letting the fund managers make the choices for you – funds can hold stock, ETFs, and actual metal. Research on Morningstar.

• TAX IMPLICATIONS—subject to change: Coins and precious metals are considered “collectibles” so when you sell, you could be faced with a nasty surprise – a capital gains rate of 28%. That is true of ETFs and mutual funds that hold metal, too. Beware! Stock in mining companies gets regular cap gains treatment – right now a max of 15% for long term investments.

Some sites I found helpful (but watch out for tax advice – can be misleading because tax law changes so often):
http://www.mahalo.com/how-to-buy-gold
http://en.wikipedia.org/wiki/Gold_as_an_investment
http://www.howtodothings.com/finance-and-money/a3707-how-to-buy-gold.html
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