Five Hidden Costs of Gold Investors Overlook

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Sept. 29, 2010, 12:01 a.m. EDT · Recommend (9) · Post:

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By Jeff Reeves

ROCKVILLE, Md. (MarketWatch) "” There's a lot of talk right now about how gold is booming, and how gold bugs who have been stashing bullion under their mattresses over the last decade or so have made a killing.

That may be true if you look at the price of the yellow stuff per ounce. The price of an ounce of gold is up about 30% in the last year, or over 400% in the last 10 years. How does that relate to actual returns for investors?

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The truth is that gold has steep hidden costs, and that looking at the numbers on paper doesn't tell the whole story. Here are big costs many investors overlook.

Higher taxes

The affinity for gold investing and a dislike of the government seem to go hand in hand, from predictions that massive government debt will render the dollar worthless to conspiracy theories that there will be another Executive Order 6102 in which Uncle Sam loots your safe deposit box and seizes your gold.

But the biggest reason for gold investors to get mad at the feds is their tax bracket. The IRS taxes precious metal investments "” including gold ETFs like the SPDR Gold Trust /quotes/comstock/13*!gld/quotes/nls/gld (GLD 128.12, +0.27, +0.21%)   and iShares Silver Trust /quotes/comstock/13*!slv/quotes/nls/slv (SLV 21.46, +0.17, +0.80%)   "” as collectibles. That means a long-term capital gains tax of 28% compared with 15% for equities (20% if and when the Bush tax cuts expire next year).

While you may see your gold as a bunker investment, the IRS will treat you the same as if you were hoarding Hummel figurines. And that means a bigger portion of your gold profits go to the tax man.

Just as the math game on gold price appreciation doesn't tell the whole story, the lack of regular payouts is another reason why the long-term profits quoted in gold are incomplete. Many long-term investors can't afford to stash their savings in the back yard for 20 years. Income is a very valuable feature of many investments and gold simply doesn't provide that. Read about seven dividend stocks with better than 11% yield.

Remember, simply looking at returns in a vacuum can't tell you whether an investment is "good" or "bad." Is it a good idea for a 70-year-old retiree on a fixed income to bet on penny stocks because they could generate huge profits? Even if those trades pay off, 99 out of 100 advisers would say something akin to "You got lucky this time, but don't tempt fate. Quit while you're ahead and don't be so aggressive."

Similarly, the volatile and income-starved gold market is not a place for everyone. Just because past returns for gold have been so stellar, that does not mean that gold is low risk or that investors who need a secure source of regular income will be well-served.

Far-fetched rumors that Tim Cook might join H-P as CEO demonstrated the main interest investors currently have in the company.

5:58 p.m. Sept. 28, 2010 | Comments: 3

What our friend Jeff here so clearly fails to understand is that our money system is in a place its never been before - quantitative easing (money-printing) with no end in sight, SKYROCKETING levels of debt, an economy muddling along (and only with the help of massive stimulus). This is a bad bad place to be and that naturally lends itself to a higher gold price.The debt built up over the..."

- Sands800 | 11:25 p.m. Sept. 28, 2010

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