You Never Talk About Gold

Well I am now! To be a gold investor, you better be informed about the Gold Market. Gold-related Investments are on the rise. Historically speaking, the value of gold-related investments fluctuates even more than the stock market according to the North American Securities Administrators Association (NASAA).  In the past 50 years, gold often moved in reverse of stocks and bonds. When stocks are down, gold seems like a very tempting investment. Before jumping onto the gold bandwagon and becoming a “gold bug,” there are a few things you might want to consider.

1.       We have multiple ways to invest in Gold. Investors can put money into actual gold metal or gold-related market investments such as close end mutual funds, open end mutual funds, futures or gold mining companies.

2.       Some mutual funds contain gold. Although several funds have gold in their name, very little gold will be found in them. As a matter of fact, no more than 10% of the assets invested in the metal are contained in the fund. That is because mutual funds by law must earn 90% of their income from securities. Metals are commodities. Metals are not securities. 

3.       Gold mining stocks are volatile. Purchasing stocks in a gold mining company is more volatile than purchasing physical gold because of the risks associated in discovering and mining the metal. Mining companies’ profits are leveraged to the price of gold, meaning that if the price rises by a certain amount, earning should jump by a greater percentage. If however, the price of gold were to decline, investors should expect to see mining companies’ profits decline in similar fashion.  Be careful of fraudulent gold mining companies that exist solely for the purpose of taking investor funds.   

4.       What about Gold as an exchange-traded product? An investor purchases a share in a trust and the shares represent ownership in physical bars of gold. Each share claims ownership of a small portion of actual gold. These trusts may have hidden costs that dilute the holder’s interest in gold. Investors having an investment in a Gold exchanged Traded Fund (ETF) may be subject to higher rates of taxation than other types of mutual funds. If taxes are an issue, you should review the prospectus and contact a tax consultant. 

5.       Should you use the Internet to purchase gold? As with any online transaction, know who you are dealing with.  Be sure they are a reputable dealer.  When researching bullion dealers, you must exercise due diligence because no dealers are authorized or affiliated with the United States Mint. 

6.       Buying Gold CDs, is it a good investment? These CDs can be as illusory as “Fool’s Gold” according to NASAA. Gold CDs differ from traditional CDs because they are tied to the price of gold. Many banks seduce investors with the promises of a share in the rising value of gold. But when the price of gold decreases, the investor only gets back the principal and the interest rate may vary significantly from that of a regular fixed-rate CD. Be aware that each CD has its own formula to calculate interest rates and its own set of rules for when the investor can sell the CD prior to the maturity date. 

7.       I heard that gold is a safe investment. An investment in gold is not foolproof. Gold investors must know their investment objective.  Gold prices fluctuate dramatically so they are not good for long term investment returns. 

8.       Don’t catch gold fever! Gold attracts a crowd of gold promoters who want to take your money.  Some may offer shares of gold exploration companies with beautiful reports and maps. In reality, they are into little or no production of gold. They just have an appetite for your money.

9.       Beware of gold investment scams. The first scam: Some promoters will offer to sell actual gold bullion and retain it for you in a secure vault. Later they promise to sell the gold for you at a higher price. Many times, the gold never existed. Always take delivery of the gold before you place it in a vault under your control.  The second scam: When purchasing gold coins, make sure that it is gold and not gold colored coins with no monetary value. Make sure that you are dealing with a dealer licensed by your state securities regulator. 

10.   Can I buy gold in my IRA? Individual Retirement Accounts (IRAs) make it possible for investors to buy gold with funds that they already have.  Gold must be insured and physically shipped before going into storage. The metal must be physically stored through an approved depository, meaning investors cannot keep coins in a closet or in the trunk of someone’s car. 

If you want to learn more about gold investments contact your state securities commission. In Pennsylvania contact the Pennsylvania Securities Commission at 1-800-600-0007 or www.psc.state.pa.us