Of all the precious metals, gold remains to be the most popular for gold investments. Gold investments can be for actual gold bars, coins or jewelry. Many investors typically purchase gold as a means of diversifying financial risk, particularly through the employment of derivatives and futures contracts. The gold market is also susceptible to extreme volatility and speculation, as are many other markets.
There are several ways gold investments can be made. One option is to use a standard savings account with a commercial bank. In this case, you would place the account with the bank as collateral for a loan. After-tax returns are reported on your federal tax return. After-tax returns may be higher or lower depending on whether the investment is made in gold or one of the other alternative commodities.
Another disadvantage of gold investments is exchange rate risk. The risk of an exchange rate going down is offset by the profit potential. For example, if the dollar strengthens against the British pound, you could buy more U.S. dollars and sell British pounds. However, if the British pound weakens against the dollar, your investments could lose worth.
The third disadvantage is the potential for large gains and losses. Gains are usually short term and earn less than the selling price of gold investments in a given time period. On the other hand, losses are long term and earn much less than the initial gold investment. Losses can result from default of the underlying contract, bankruptcy or market fallout. You could incur fees for exchange rate predictions and margin trading.
You should bear in mind that gold investments cannot be characterized as either collectibles or securities. They are neither tangible nor intangible. They are a financial investment and subject to the same tax rules and restrictions as any other investment. The IRS will consider any gold investments held for the owner’s personal use or on behalf of a charity as taxable income for the owner.
Tax implications of gold investments range between a one-time gain taxation depending on whether the gold mining stocks are sold for a capital gain or as stock. If sold as stock, however, investors may be liable for capital gains and dividends on sales. Selling for personal use would not be tax liability unless the proceeds were used specifically for personal consumption. A one-time gain may be subject to an alternative minimum tax, depending on the age of the person who owns the gold mining stocks.
There are various forms of gold investments. Several types of gold investments are secured by bullion coins. One type of gold investment is gold mutual funds. Gold mutual funds offer advantages over other forms of gold investments. Gold mutual funds may also offer flexibility in terms of minimum withdrawal provisions. The tax considerations associated with gold mutual funds are similar to those of other mutual fund investments.
When buying and selling gold bullion, it is important for investors to realize that the price of gold always increases and decreases. To minimize losses in an unprofitable portfolio, it is important to diversify the holdings of a portfolio. Diversification across asset classes, whether across asset classes such as equities, bonds, and mortgage investments or across commodity markets such as oil, copper, and gold futures and options could help maximize returns and minimize losses.
Gold options are another category of gold investments. Gold options are contracts for the sale or purchase of gold at a future date at a pre-determined price. Investors need to make careful decisions when purchasing gold options because they involve risk of loss. Investors should consider the risk-premium of the gold options and should only invest with money insured by CD or a qualified bank.
Futures and options investing are another category of gold investments. Investors can benefit from these investments if they do not have an immediate need to access gold. Gold futures and options contracts specify future delivery at pre-determined prices. Investors in gold options may benefit if the price of gold fluctuates between the time of purchase and the time of sale. In this case, the investor would be able to sell gold at a profit and buy it when the price of gold fluctuates.
While gold futures and options provide some advantages over other gold investments, they also include some disadvantages. Most of the time, gold futures contracts have higher commission rates than other investments. Also, the price fluctuations of gold futures contracts greatly affect the amount of gain or loss to an investor will make.
