People love investing in gold. It's tangible, and it's been considered “pure” money for millennia. But you still need to tread carefully before you invest in gold.
Anytime you invest in anything, it's important to do your homework. You should understand how investment works and some of the fundamental forces influencing it. And you should avoid the hype. No matter how “solid” something seems, be aware that any investment is influenced by perception and market forces. This includes gold.
Perception Matters When You Invest in Gold
Many gold bugs like to think that gold is “pure” money. It has intrinsic value because it's tangible, precious, and has been used for millennia. However, like other assets, gold is subject to the whims of the market and perception. Two of the main reasons investors use gold include:
- Hedge against inflation: Since gold is denominated in dollars, it often (but not always) moves inversely to the U.S. dollar. This means that it can be used to hedge against inflation. As the buying power of the dollar diminishes, gold's value increases.
- Safe haven: Gold is also used as a safe haven investment. During times of economic turmoil, gold is considered to be safe. You can touch it and hold it. And, recently, gold has become a favorite of those who wish to hold some sort of tangible money; they expect it will be the only thing of value in the event of a complete economic collapse. Hoarding gold coins and other forms of gold — and other precious metals — has grown in popularity.
However, it's important to note that perception does matter. Gold prices are affected by market forces, and the markets are impacted by how people perceive how things are going. And that's something you have to consider. Just because gold is, well, gold, doesn't mean it's immune to bubbles. Just like any investment, you need to be aware of the possibility of a burst bubble.
Is Gold Really Useful During Economic Collapse?
As a side note about perception, you also need to consider your reason for investing in gold. This is true of any investment. Whether you're looking at stocks, real estate, cryptocurrencies, or gold, you need to know why you're investing and where it fits into your portfolio and overall financial planning.
One of the biggest reasons people give for investing in gold has to do with economic collapse. They want “pure” money in a world that looks so different. However, if this is your reason to invest in gold, you need to take a step back.
- How many people will want to use gold if everything goes to shit? Like, will they want your shiny metal in exchange for their food?
- Along with that, can you use gold for anything related to survival? You can't eat it. It's not like guns and ammo, which you can use to hunt and acquire food. You can't sleep in it. It doesn't provide shelter or clothing or transportation.
- When preparing for an economic collapse, it might make more sense to consider food storage, how to grow and prepare your own food, and how you will deal with weather and changing temperatures.
At any rate, gold is most likely to be useful after society begins rebuilding from a total collapse. However, there's no guarantee that we'll have a system like our current system. Money might not be the same, and gold might not be considered valuable.
It's an interesting exercise. There's nothing wrong with believing gold is valuable and using it in your portfolio. However, it's also important to consider the risks of putting too much of your portfolio in gold based on the perception that it will always be valuable.
What About Storing Your Gold?
Another consideration is what form you will purchase it in — and how you will store it. If you are investing in gold stocks, you are really just investing in another equity that can be treated like any other stock. Pay attention to your asset allocation and review your holdings regularly to ensure your portfolio is on track.
There are other ways to invest in gold that don't require you to store it. Investing in gold ETFs can reduce the need to figure out what to do with your hoard. If you are investing in physical gold, you will need to figure out where you will keep it. Will you keep it on-site? Or will you pay for someone to store it?
If you are investing in physical gold because you are worried about what's next for the economy, it makes sense to have it close to hand. It won't help you much if the economy collapses, and you must try to get your gold from some vault 1,000 miles away. Of course, if you store it at your home, you will need to be careful since you don't want to become a target for thieves. Before you start buying up gold bullion or coins, make sure you think through the situation, and plan for it.
Consider the cost of storage as well. Home storage costs less. You just need to buy a good safe and have the space for it. You'll pay a premium if you buy gold and store it elsewhere. Storage fees will ultimately cut into your overall returns.
Taxes When You Invest in Gold
Finally, if you are using gold as an investment that you hope will result in capital gains when you sell, you need to be aware of the tax implications of physical gold. Most gold is taxed at the collectibles capital gains rate, which tops out at 28%. Gold stocks are treated like any other stock investment, but some ETFs are treated as collectibles when you sell. Certificate gold, electronic gold, coins, wafers, and bullion are all treated as collectibles for tax purposes. The main exception to physical gold as a collectible is jewelry. You don't have to pay taxes when you sell your gold jewelry — even if you end up with a gain.
Knowing the tax implications of your investments is smart since it can help you with your tax planning down the road, and you can make better decisions.
Bottom Line
Gold can make a positive addition to your investment portfolio. As part of a well-thought-out asset allocation strategy, gold can provide a degree of safety and maybe even growth. Consider your investment goals, and examine why you want to invest in gold. Also, consider the tax implications and some of the complications that can come with owning and storing physical gold. Don't assume you're totally set just because you're investing in gold.
