Monday, February 20, 2006

Gold ETFs or Gold Coins?

The extraordinary and popular expansion of gold ETFs (Exchange Traded Funds) in the gold market has prompted the question 'Are gold ETFs taking over the gold money market?' It has even been said that the increase purchase of gold by ETF funds has partially driven the current bull market.

The apparency that gold ETFs give the smaller investor a better spread on their investment is somewhat outweighed by other factors.

The buy in and sell out cost on gold EFTs is smaller than on purchasing actual bullion. With bullion you have the dealer mark ups on the buy and a reduced below actual gold cost per ounce on the sell. Bullion is somewhat of a longer term market but with gold being a bull market currently, the concept of being able to buy gold and even sell it for a nominal broker's fee seems very attractive for the small investor.

What is often over looked however is that gold ETFs are considered an investment activity and therefore subject, in many countries, to a capital gains tax or income tax. Accumulating or buying and selling gold coins however are usually not as they are actual legal currency.

There are some exceptions however as in some US states it seems a capital gains tax may be charged if one sells gold bullion coins. So in all situations when it comes to any investments or the buying or selling of gold in any form, and potential tax considerations, one should always consult with ones own financial advisors.

In addition, regardless of being backed by gold, other influences affect the gold ETF which is in reality a just a share backed by gold rather than the gold itself. This is demonstrated by the fact that you cannot take delivery of solid gold if you cash or trade in your ETFs. You will only be paid in cash..

There is a vast difference between owning actual gold and owning a certificate or piece of paper that says you own shares in a gold pool.

If that gold is not in your possession it is subject to the influences, such as governmental and bank regulation, in whatever country and bank it is deposited.

It is subject to the short term frame of mind where investors buy in to make a quick buck and sell out. This does nothing to increase the stability of the precious metal.

Of course there is nothing wrong with gold EFTs. They have wriggled themselves into a niche in today’s gold market by providing a platform for investors to invest in gold who ordinarily would not, without exerting too much effort.

It is probably too soon to say if they have found their level playing field. Hard gold bullion is still the favorite of die hard gold investors, especially for the long term. Eventually a balance will be found as those that want to 'play' investment will be satiated and the gold 'nuggets' of the industry will still be around buying and selling actual gold coins and bars.

So in the game of gold EFTs vs Gold Coins, it is unlikely that gold ETFs are taking over the gold money market. Just providing a lazy way for investors to jump on the gold band wagon.


Anonymous said...

"...ETFs are considered an investment activity and therefore subject, in many countries, to a capital gains tax or income tax. Accumulating or buying and selling gold coins however are not as they are actual legal currency".

From what I know, in the US some states do not charge tax for buying gold bullion coins, however when you sell them (for a profit) you are required to pay capital gains tax, much like other forms of investment - higher tax for short term (up to 35%) and lower for longterm (more than a year, down to 15%). Pre 1933 gold coins are taxable as collectibles at 28% I believe. Isn't that the case?

goldtoday said...

When it comes to buying or selling gold in any form, ETFs or gold bullion, it is prudent to consult with your own tax and or financial advisor as regards any tax implications. Different States in the US have different laws and interpretations of such laws so it is wise to have some understanding of them.