As gold prices soar to record levels — they hit a record intraday high of $1.675.90 today — cases of gold fever have hit epidemic levels. Investors need to inoculate themselves against this “disease” before it’s too late.
Like eating chocolate, gold investing is best done in moderation. Eating too many sweets leads to tummy aches and, in some cases, obesity. Overindulging in gold makes investors vulnerable to the eventual crash in the price of the precious metal. Unfortunately, investors these days don’t want to hear about gold investing, and it’s easy to see why given how often gold’s virtues are touted on cable TV commercials. Remember: Numerous studies have shown that, over the long term, gold is a lousy investment.
There is a smart way to invest in gold, and there is a dumb way. Savvy investors have exposure to the commodity through either physical gold ETFs such as SPDR Gold Trust ETF (NYSE:GLD) and the iShares Gold Trust (NYSE:IAU) or gold miner funds such as The Market Vectors Gold Miners ETF (NYSE:GDX) and the Junior Gold Miners ETF (NYSE:GDXJ). It’s best to have exposure to both the physical metal and the miners for diversification, though the physical ETFs are performing better now.
As for the dumb way to buy and sell gold, examples are numerous. Here are a few of the more egregious ones:
Gold parties
For people bored with parties hawking Tupperware and gourmet cookware, there are gold selling festivities. US Gold Buyers, a gold buying service, will even cover the cost of food and drinks. Alcohol and investing rarely are a good combination.
Coins and bars
Gold can turn the most prudent investors into “The Simpsons'” Mr. Burns if they can touch gold coins and (for the lucky few) bars. The downside? Gold is not a liquid asset, meaning that just because you want to sell doesn’t mean you will be immediately able to find a buyer. Worse still are the taxes. The government considers gold coins and bars “collectibles” for tax purposes, along with the ETFs based on physical gold. Sellers will be hit with a capital gains tax of 28%.
Gold crap
As gold fever reaches a fever pitch, some people decide that anything with gold has to be cool. One jeweler is offering a diamond-encrusted gold grill that covers eight teeth for $3,838.70. Not your taste? A Hong Kong jewelry store reportedly spent $4.8 million on a gold bathroom. Customers who spend $128 can use a real gold toilet.
Gold sweets
If a trip to Asia is not on the horizon, you can buy chocolate with edible gold flakes from a Swiss chocolatier. Godiva also offers gold chocolate truffles, and a New York restaurant called Serendipity offers what it calls Golden Opulence Sundae for $1,000. Diners need to order this treat, which is in the Guinness Book of World Records, 48 hours in advance.
Gold teeth
Desperate people around the world are selling their gold dental work for quick cash. “The best part about selling gold teeth is that unlike that heirloom gold necklace or grandma’s old sterling silver flatware, dental gold typically has very little emotional value,” says Arch Enterprises, a buyer of dental gold. One catch is the amount of gold in teeth can vary quite a bit. The other problem is sellers must pay their dentist a few hundred bucks to refill the hole in their head with porcelain. Let’s not forget the capital gains taxes we discussed earlier that will take a big bite out of your profits.
Jonathan Berr owns IAU.
