Beware Gold's Hidden Costs

NEW YORK (TheStreet) -- 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 30% in the last year or a year or 400% in the last 10 years ... but how does that relate to actual returns for investors?

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 three 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.

> > Bull or Bear? Vote in Our Poll

But the biggest reason for gold investors to get mad at the feds is their tax bracket. The IRS taxes precious metal investments -- including precious metals ETFs like the SPDR Gold Trust(GLD_) and iShares Silver Trust(SLV_) -- 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.
High Ownership and Storage Costs

Maybe through some creative accounting or selective amnesia at tax time you can mitigate the tax burden of gold. But one expense you can't as easily avoid is the high ownership cost of gold. After all, it's not like you mined it yourself -- and all those middlemen between the ore and you want to get paid.

The first is that old tightwad Uncle Sam again. Even if you can avoid him going on the capital gains front, he gets you coming into gold via sales tax on most jewelry and coins. And then there are the high transaction costs and commissions that gold can carry. Anyone who has bought jewelry knows significant markups are part of the precious metals trade, and that's the same for investment gold as it is for engagement rings. The bottom line is that some of your initial buy-in goes towards the business of gold and you'll never get it back, not unlike realtor fees or broker fees.

BACK to margotbworldnews.com