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Nuggets About Investing in Gold

Date: June, 2010

Are you interested in buying gold as an inflation hedge? Be wary of the potential pitfalls. Typically, the price of gold is subject to extreme price fluctuations and may be adversely affected by changing economic conditions. If you decide to invest, here are four common methods: 

1. Gold bars or bullion: Gold bars can generally be purchased in quantities as small as one gram, although some investors favor one ounce gold bars. Other costs are connected with this investment, such as broker commissions, insurance and storage fees. When you sell the bars, you may have to pay an assay charge for each bar. 

2. Gold coins: Several countries throughout the world issue gold coins. The cost is generally equal to the spot market for gold plus a small commission and minting fees. Note: Certain gold coins may be held by IRA accounts. This is an exception to the general rule prohibiting IRA investments in collectibles such as precious metals.

 3. Gold mining stocks and mutual funds: Gold mining stocks are traded on the stock market, so they are subject to the same risks as other stock investments. Mutual funds that invest in gold generally are not as volatile as individual stocks. You can purchase shares the same as with any other mutual fund. These mutual funds also offer diversification and professional management.

 4. Gold exchange traded funds: An exchange traded fund (ETF) is an investment trust sold on one of the major stock exchanges. As with a mutual fund investment, it reflects the price of gold bullion, without any of the hassle and markup of owning the metal directly. Furthermore, you can sell your shares quickly. But this convenience has a price: You will incur brokerage fees for buying and selling an ETF.

 For tax purposes, an investment in gold is generally treated as an investment in a collectible. Thus, if the gold is held longer than one year, any gains from sales are taxed at a maximum 28% tax rate (as opposed to the usual 15% rate on other capital assets, such as most securities). Otherwise, such a sale results in tax at ordinary income rates. Also, note that special complex rules apply to purchases of gold futures.

 Final words: Consider all the relevant tax and nontax factors of this investment. Rely on your professional advisers for expert guidance.
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