Week 17 Day 6: How to Own Gold (If You Must)

Gold ETFs hold actual gold bars in vaults and track the gold price. IAU (iShares) charges 0.25%, GLDM (SPDR Gold MiniShares) charges 0.10%, and GLD (the original and largest) charges 0.40%. GLDM is the cheapest for buy-and-hold investors. Avoid gold mutual funds, gold mining stocks (too volatile), and gold certificates (counterparty risk).

Your gold options ranked: (1) GLDM -- lowest cost, backed by physical gold, $0.10 per $100 invested annually. Best for most people. (2) IAU -- slightly more expensive, larger and more liquid, held in trust by Bank of New York Mellon. (3) GLD -- the original gold ETF, massive liquidity, but costs 4x more than GLDM. Better for traders than holders. (4) Physical gold (coins, bars) -- no counterparty risk, but storage costs, insurance, wide dealer spreads (often 3-5% above spot), and potential for fraud. Only makes sense for those who genuinely distrust the financial system. (5) Gold mining stocks (GDX, GDXJ) -- these are leveraged bets on gold because mining companies have fixed costs. If gold rises 10%, miners might rise 20-30% (or fall just as hard). Not a substitute for gold exposure. Important: in taxable accounts, gold ETFs are taxed as 'collectibles' at a maximum 28% capital gains rate -- higher than the standard 20% for stocks. This is another reason to keep gold allocation small and consider holding it in tax-advantaged accounts.

The tax treatment of gold deserves attention. Physical gold and physically-backed ETFs (GLD, IAU, GLDM) are classified as 'collectibles' under IRC Section 408(m), subjecting long-term capital gains to a maximum 28% rate rather than the standard 20% rate. This tax drag compounds significantly over long holding periods. For a high-income investor holding a gold ETF for 20 years earning 5% nominal returns, the difference between 20% and 28% capital gains tax reduces the after-tax terminal value by approximately 8%. Options for tax-efficient gold exposure: (1) hold gold ETFs in a Roth IRA (eliminates all tax), (2) hold in a Traditional IRA (converts collectibles gain to ordinary income at withdrawal -- may be lower or higher than 28% depending on retirement bracket), (3) use gold futures ETFs like DGL (Deutsche Bank Gold, structured as a limited partnership issuing K-1s), which can be taxed under the 60/40 rule (60% long-term, 40% short-term regardless of holding period). The Sprott Physical Gold Trust (PHYS) is structured as a Canadian closed-end fund eligible for long-term capital gains treatment at the standard 20% rate for U.S. taxpayers -- a potential tax advantage over GLD/IAU, though often trading at a premium or discount to NAV.