By Azanda L. Donaldson
The Daily Record Newswire
What is behind the dramatic rise in gold prices and the increased interest of investors in gold?
Television ads are touting gold purchases; newspapers and websites are rife with ads. When I Googled “the golden mask of Agamemnon,” an ad popped up for a company dealing in gold. Being bombarded with the desirability of the yellow metal and uncertainties in the economy, it is no wonder investors are asking whether gold is in their portfolios or whether they should buy it directly.
Several factors contribute to the obsession with gold. One is historical: Gold is both a monetary asset and a commodity. Historically, gold has been used to back currency. In 1933, President Roosevelt’s Executive Order called in the gold in circulation. Direct ownership of gold by individuals was banned except for certain coins of historical significance.
As of Jan. 1, 1975, the ban was lifted and the gold standard was abandoned. In 1977, Congress removed the president’s authority to regulate gold transactions during periods of national emergency, except for times of war.
Gold has been used as a hedge against inflation. Paper money can be printed in whatever quantities the government deems appropriate. In that case, more paper money must be used to buy gold.
What is interesting is that the recent run up of gold prices has occurred in a period of low inflation. Recently, the government announced that Social Security recipients would not receive a cost of living increase in 2011 — the second year in a row.
As the world comes out of a serious financial crisis in which homes were lost, portfolios were crippled and livelihoods were threatened, the shiny metal represents stability in uncertainty — it is emotionally gratifying.
Investors who deal in million dollar transactions have the advantage of economies of scale. For more modest investors, gold purchases must be weighed carefully. At about $1,360 per ounce today, gold has risen substantially and certainly could go higher. Although some analysts say gold could rise to $4,000 to $5,000 per ounce, the likelihood of achieving those high levels very soon is questionable.
Gold was selling at $800 per ounce in the late 1970s and early 1980s, but its price dropped below $300 from 1998 to 2001. Even after a considerable downturn in the equity markets, after 2002 gold traded in the $300 to $600 range and did not reach $800 until late 2007.
In reading the advice of gold experts, many recommend buying gold in physical form, not as shares, futures, ETFs or other non-physical investments. The newly minted American Gold Eagles, Canadian Maple Leafs, Krugerrands or bullion should be considered, as they are stamped with weight and purity. The uniformity of the coins enables them to be readily identified and makes them more tradable. Old European coins are denominated in other weights and their purity or gold content is not always standard. Older American coins, such as the Libertys and the St. Gaudens, may have numismatic value depending on their condition. They were intended for circulation and have a gold content of 0.9675, not the 0.9999 of the recently minted coins. Collectable or rare coins are worth more than their gold content, but evaluating them requires expert appraisals.
Gold sellers want to make a profit. The daily spot price of gold is not necessarily what a buyer will pay for a gold coin. Not surprising, the more coins that are purchased, the lower the price. There are mark-ups by sellers, delivery costs and possibly even sales tax, depending on the amount of the purchase. An old New York sales tax regulation — assuming it is still in effect — imposes a tax on purchases less than $1,000 of precious metals.
Once delivery is made, the next question is storage. Depending on the amount of gold, investing in a home safe or a professionally managed depository may be recommended. That adds to the cost of the overall investment.
In computing the total return of the gold investment, one must factor in such ongoing costs, the lack of income from the investment and commissions when the gold is bought or sold. Do not forget the capital gains tax.
Certain gold investments can be held in IRAs. For many individuals, retirement assets constitute the largest portion of their investable assets and might result in a sizeable portion invested in gold. IRA investments, however, must be held by an IRA custodian. They cannot be kept at home or in a safe deposit box. That also adds to the cost of a gold investment. Several trust companies deal in the physical delivery and storage of gold as part of an IRA portfolio and will bill for their services, as the gold produces no income from which to pay the fees.
Investors who believe gold should be part of their portfolio should do their research and allocate funds in a prudent manner among this physical asset and other financial assets. Proper asset allocation provides growth and income. A gold Krugerrand will not buy a loaf of bread at the grocery store.
Azanda L. Donaldson is a vice president at Karpus Investment Management and can be reached at (585) 586-4680.
