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# Investing in Gold

Advocates of gold investing believe that it is the best hedge against inflation and stock market declines. Of all the precious metals, gold has consistently been the most popular investment as a store of value. Historically, gold has performed well during periods of high inflation. It must be noted, however, that as with any other investment, money can be made or lost in gold. For instance, both inflation and the price of gold declined in the first four years of the twenty-first century. When the price of gold rises above its original purchase price, investors realize capital gains when selling; capital losses are incurred when the selling price is lower than the purchase price. Gold is classified as a collectible by the Internal Revenue Service; long-term capital gains (if the investment is held for more than one year) are therefore taxed at the 28 percent rate. Because gold investors receive no interest or dividend payments, positive investment returns are dependent upon rising market prices.

Investors can take ownership of their gold in many different forms, such as gold bullion, gold coins, gold mining stocks, gold mutual funds, gold options, and gold futures. Gold bullion, or bars, are typically bought and sold through brokerage firms or gold dealers. Gold bars trade at a premium (an amount above) to the market price of gold. After purchase, the bullion generally remains in the custody of the brokerage firm or dealer, where storage and insurance fees are charged. If, on the other hand, the investor decides to take physical possession of the gold bars to avoid these additional costs, a number of other factors must be considered. For example, the gold bars must be stored in a safe place. In addition, when the bars are purchased, the broker or dealer should issue a numbered certificate that matches the numbers on the bars. When the investor sells the gold bars, the certificate must also be presented along with the bars to ensure their identity and authenticity. This does not, however, always prevent the investor from having to assay the gold (in other words, to analyze it to determine its composition) to guarantee its quality; these costs must also be borne by the seller.

Fortunately, storage and assay costs can be avoided by investing in gold coins instead of gold bullion. Although gold coins also trade at a premium to the market price of gold, this form is considerably more cost-effective for small investors. Two important considerations of investing in gold coins are their numismatic value and the gold content of the coins. The numismatic value of the coins is related to their value as collector's items. For example, South Africa's Krugerrand is a widely traded gold coin; conversely, older and more rare coins such as the French Napoleon typically trade at many times their gold content, which is the second consideration. For instance, the Canadian Maple Leaf consists of one troy ounce of fine gold, making it a more attractive investment than a gold coin containing less than one troy ounce.

Indirect gold investments can be made through the purchase of the stock offerings of gold mining companies. It should be noted that the prices of gold mining stocks do not always move in the same direction as the market price of gold. This is due to a number of factors. For example, the costs to mine gold can vary significantly among mining companies. The length of a particular mine's life gives one indication of the costs to extract the gold from that mine: a long life implies that the mining company generally won't have to go any deeper into the mineshaft to extract gold, whereas a short mine life implies a deeper, more costly process to remove it. The largest gold mining companies are in South Africa, Canada, and the United States.

Gold mining stock prices tend to be more volatile than the actual price movements of gold, which can explain why some gold mining company stocks decline when gold prices rise and vice versa. One reason for this tendency is that some gold mining companies hedge their future output using gold futures contracts. However, despite the overall short-term volatility, gold stock prices generally do manage to keep pace with the longer-term price trends of gold bullion. When investing in stocks of gold mining companies, the wise investor should look for organizations with long lives and low extraction costs.

# Relative Articles

- A few Questions and Answers about Gold
- Investing in Collectibles
- Gold Bullion: Coins
- Numismatics: Is it for you?
- Gold and Silver as Mediums of Exchange
- Selecting a Gold Firm

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