Owning gold can be a 24 karat-sized headache. First, there's the problem of just carting the stuff around.
On a recent episode of the hit cable TV show Pawn Stars, a customer swapped his classic 1932 Lincoln roadster for $95,000 in gold. When the spunky retiree took possession of his fortune -- piles of gold coins -- the store had to hire a security guard to keep him and his loot safe.
However, hiring muscle to fend off ne'er-do-wells may be the least of the newly minted Midas' problems. When the gold glow begins to fade, the Pawn Stars customer may regret not taking the cash and running when he had the chance.
Don't Get Blinded by the Light
Investing in gold is much more complicated than buying and selling a stock or bond. And while gold can have a place in a well-diversified portfolio, before you buy bullion, consider the costs and complications that go with it.
1. You'll pay a king's ransom in taxes.
Physical gold is subject to a capital gains tax of 28%, one of the highest rates of taxation on investment property.
The tax hit isn't limited to gold bullion or coins in your collection that you decide to sell. To the IRS, exchange-traded funds backed by physical supplies of gold, such as the SPDR Gold Trust ETF (GLD) and the iShares Gold Trust (IAU) are considered a collectible, like a work of art, and are taxed accordingly.
2. Gold could be the next dot-com bubble.
Gold fever is reaching record temperatures right now. But that hasn't been -- nor will it always be -- the case. When it comes to gold, as in everything else in investing, diversification is key.
Historically, gold's returns have been lousy. As University of Pennsylvania finance professor Jeremy Siegel wrote in his seminal book Stocks for the Long Run, $1 invested in gold in 1802 would have yielded 98 cents in 2001 compared with $599,605 invested in stocks when adjusted for inflation.
While some exposure to gold is good, says Steve Ayer, managing director at HighTower's Strata Wealth Management, "that does not mean that somebody should have all their money in it." Those investors may find themselves as financially troubled as the people who went all-in on tech stocks before the bubble burst, he adds.
3. There are cheaper ways to buy it.
Most of Ayer's clients prefer to invest in gold miner stocks and ETFs rather than the physical gold itself. Shares of gold miners such as Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM) are not subject to the high tax rates of coins or bullion and investments backed by physical gold. Same with ETFs that hold stocks in the miners, such as the Market Vectors Gold Miners ETF (GDX) and the Market Vectors Junior Gold Miners ETF (GDXJ). Plus, says Ayer, "Right now the mining stocks are cheaper compared to the bullion."
4. That classic car may be a keeper after all.
One idea that apparently did not occur to the man on Pawn Stars was holding onto the car.
According to Oliver Pursche, president of Gary Goldberg Financial Services, which manages $500 million in assets, a pre-war classic car like the 1932 Lincoln, which apparently is in immaculate condition, can appreciate in value by 15% to 20% annually. "Over time, they have proven to be a very good investment," says Pursche, an antique car buff.
Did the Pawn Stars customer make a smart investing move or a dumb one? Share your thoughts below.
Motley Fool contributor Jonathan Berr owns shares of IFAU.