Recently a CEO client of mine sent me this email:
“Hi Matt,
Do you know anything about investing, buying and selling gold? Who to deal with? Etc.?
Charlie”
The fact is, I knew very little about buying, selling or investing in gold. I did know, however, that the presence of gold among the assets of a client that I am giving tax and estate planning advice to raises many questions. The most important one is are you are an investor or a collector? The next most important is to find out their goal. Is it investing, collecting or both? It is important to know the difference between collecting and investing or just being a hobby.
Investing in Gold: Investors buy gold as a hedge against the rise of inflation, the fall of the stock market or the change in the strength of the dollar. The two common ways of investing in gold is to hold gold indirectly, either through a fund that holds gold directly, for example the Gold ETF (ticker symbol GLD);or hold stock in companies that mine and refine gold, such as Barrick Gold (ticker symbol ABX), or directly by buying bullion, either in the form of coins or bars.
As with any investment, you need to weigh the risks and the rewards. The risk of indirect investment in gold is that your investment is not only subject to the market risks of the rise and fall of the price of gold, but also the industry risk and the possible fees charged in a fund. The risk of direct investment in bullion is that when you decide to sell the bullion, you may find the fees charged by the broker are quite high. Gold does not produce a dividend, and there is the risk of higher federal capital gains tax on bullion (28% + 3.8%) over that of the sale of the stock or fund units (20% + 3.8%).
Collecting Gold: Although there are many stories of people who acquired gold numismatics, (gold coins that have a higher-value than just the metallic weight), for a song and sold for a king’s ransom, this is not how a serious collector purchases gold. Collector’s buy both because they work hard to make the best deal that they can on buying or selling coins and because they are passionate about the coins they do collect.
Passion can come from a personal connection to the coins. Often collectors try to create a “type” collection that is a complete collection of all of the coins of a certain classification or type. For American gold coins, the types include $1, $2.50 (a quarter-eagle), $3, $4, $5 (a half-eagle), $10 (an eagle), and $20 (a double eagle). In each type, there are some years and varieties which are more common and some that are less common (if not unique). The rarer coins are called Key Coins and they command a vast premium over the more common coins. When a collector’s hard work, knowledge and diligence pays off with the acquisition of such a key coin, especially for a good price, it is the stuff long tales (if not tall tales) are made of.
There are some people who start out investing in bullion, who then get “the bug” and start collecting numismatics. My experience is that the serious investor is no more reluctant to sell bullion than they would be for any other investment. On the other hand, serious collectors are reluctant to part with a collection, especially with their Key Coins.
The advice investors need is how to minimize or avoid the income taxes on buying or selling. For a collector the issue is how to preserve the collection and to avoid selling, either to pay estate taxes or meeting the financial needs of themselves or their family. So, if you are thinking about buying gold, define for yourself, if you want to be an investor or a collector? Once you can answer this, then ask yourself what your goal is? The answer to these two questions will determine the type of estate and tax planning to best address your needs.
Matthew Erskine is managing partner at Erskine & Erskine.