Looking to hold your gold investment in the palm of your hand? There are several ways to own physical gold, and for an investor, collector or enthusiast, some forms may be more suited than others.
As with any other type of physical asset, the more you know about your options, the better your investment choices. Let’s take a look at some of the most common types of physical gold.
Gold Bullion
Bullion is one of the most straightforward ways to invest in the gold industry, but may not be as appealing as jewelry because of its somewhat ‘bland’ appearance. However, bullion is a very feasible investment vehicle for those looking to get into the gold industry, given its very approachable price point. Unlike paper gold, whose value may or may not be tied to gold, the value of bullion is inherently tied to, and depends on, fluctuations in gold prices.
In the industry, bullion refers to a precious metal cast in bar or ingot form. Although the term is widely applied to precious metals such as gold, silver and platinum, it may also describe base metals such as copper and aluminum.
The origin of the term is French; the word ‘bullion’ is derived from the French word for ‘boiling,’ which refers to the minting process whereby the metals were melted in order to cast into a particular shape. Bullions are subject to very strict regulatory standards worldwide. For instance, gold bullion is required to be over 99% pure.
If you’re new to investing in precious metals, the plethora of investment options available, as well as making sense of the cornucopia of terms and industry jargon can be quite overwhelming. One of the most important terms in gold and silver investing is ‘bullion.’ Let’s take a look at what bullion is, the different types of bullion, and why you might consider it as an investment.
What is Bullion?
Bullion is a pure form of precious metal, usually in the form of bars, ingots and coins. The term usually refers to precious metals such as gold, silver, platinum or palladium, but can also be used to describe tradable amounts of copper, aluminum or other base metals. ‘Bullion’ comes from the French word for ‘boiling’ and describes the mint where metals are melted down before being cast into shape.
To be considered bullion, a bar or ingot of metal must adhere to very stringent purity standards, for example, over 99.5% for gold bullion bars.Bullion coins are usually not nearly as pure, such as the ubiquitous U.S. Gold Eagle (91.67% gold, 3% silver and 5.33% copper), but are frequently referred to as ‘bullion,’ regardless.
Bars and Ingots
Much of the world’s gold is cast into heavy bricks, bars, or smaller, more portable bars, called ingots. These types of bullion are usually very pure (over 99.9% or more) and held either in high-security vaults, safe deposit boxes or secure home safes. Because of their high purity and large size, bullion bars are worth many thousands of dollars and can be expensive to store and protect.
Take for example the widely-circulated 10 oz. bar, a staple in the world of gold trading. A high-purity specimen of a 10 oz. bar from a renowned mint may be worth between $17,000 and $17,500, depending on the strength of the gold market. Learn more about gold bars and brands, or also about gold rounds, which are similar to bars in every way except their shape.
Bullion Coins
Many investors choose to invest in gold coins instead of bars because they are easier to store and trade and are generally more available. Bullion coins, like bars, base their value on how much precious metal they contain, and investors should take note not to confuse a bullion coin with a collectable coin.
A collectable coin, also known as a numismatic coin, bases its value on rarity or historical significance, rather than the weight of precious metal in the coin. As an example of a bullion coin, a 1 oz. Krugerrand Gold Coin is 91.67% pure gold and worth approximately $50 over the spot price of gold.
Why Invest in Bullion?
Like all precious metals, gold has been a popular hedge against economic upheavals and currency crises, and will likely remain so for years to come. Bars or ingots are a sound investment if you’re looking to make a sizable purchase. Since bars carry lower premiums than coins, an investor who has the financial capacity to buy in volume will make the most of the investment in terms of value.
If you aren’t ready to commit more than a few thousand dollars’ worth of investment in gold, coins might be a good market to begin in. They still have a relatively low cost over spot price, and their ease of availability and low storage costs make gold coins a very feasible investment vehicle for beginners and veterans alike.
Tax Benefits
The IRS classifies gold bullion as “collectibles,” which carry special tax treatment. All profits from gold trades are considered gains on sales of collectibles. If you make a profit from a gold trade (buy low, sell high) and you had held the investment for less than a year (that is, your “sell” date is less than a year from your “buy” date), the IRS classifies the gain as a “short term capital gain.” This is taxed at your ordinary income rate.
If you held the investment for more than a year, then any gain from the trade is a “long term capital gain,” which is taxed at 28%, the current long-term rate for collectibles.
A significant tax advantage of trading gold is that collectibles are not subject to “wash sale” rules, which prohibit an individual from taking a loss on a security and immediately repurchasing the security. This means in weak markets, you can sell your gold investment for a loss, recognize the loss for a tax benefit, and immediately buy back the gold at the prevailing market price.
IRA Diversification
You can hold certain types of gold bullion coins in your IRA, giving you a novel way to diversify your financial portfolio with a physical asset. Another reason you may want to consider adding gold bullion to your IRA is that it also allows you to take advantage of tax breaks that many common types of IRAs enjoy.
Adding gold to your IRA is a sound retirement planning strategy, and can be done with minimum hassle through an IRA custodian. The process of adding gold bullion to be held in your IRA entails some preliminary paperwork. Once the custodian receives your funds and paperwork, you can specify what kind of bullion you want to add to your IRA. At the time of distribution from your IRA, you can convert your gold to cash or take delivery of physical gold.
Historical Performance
From beginners to seasoned investors, a key consideration when it comes to investing in different markets is which offers the highest rate of return. Comparing historical performance of the gold market to the stock market, it is evident that gold is a safer and much more profitable investment avenue.
Let’s look at a hypothetical scenario. Suppose you invested $5,000 in gold bullion in 2001. That initial investment would have been worth more than $22,000 by the end of 2012. This represents a staggering rate of return of 333%. The same amount invested in the stock market in the S&P index would have returned $115. Compared to the gold market’s 333%, the stock market’s 2.3% return seems paltry at best.
No matter which way you look at it, gold bullion is one of the safest and most lucrative investment opportunities available today. It’s worldwide appeal, convenience of entering the market, and historical market make it an investment like no other.
Numismatic Investments
A ‘numismatic investment‘ is probably more commonly, and somewhat misleadingly, known by a more popular term: coin collecting. While bullion coins are bought and sold based on the weight of precious metal they contain, numismatic (meaning: collection or study of currency) investing has as much to do with precious metal content as it does with rarity and quality.
Numismatic coins are often made of gold or silver, but their value is not based entirely on what they are made of, but how many of them exist and how good a specimen it is. If you are simply looking to gain gold or silver exposure, bullion or normal coins are a better idea than numismatics.
Jewelry
Like investment and bullion coins, jewelry made out of precious metals is easy to store and resell, but has lower percentages of pure gold, silver or platinum than bars or ingots. Gold jewelry can still be a good investment, but you’ll need to make sure you do your research to ensure your money is buying you quality.
Pieces by well-known jewelers like Cartier or Tiffany are extremely safe bets and are quite beautiful to behold, but will not come cheap. When buying from lesser known jewelers, make sure you know what you’re looking at and what each piece is potentially worth.
Jewelry retailers tend to mark their wares up to turn a profit on clients not particularly interested in buying for investment purposes, so be weary of ‘discount’ or shopping mall retailers. In general, we discourage investors from purchasing gold jewelry over bullion or coins.