A Personal Finance Blog for Malaysian: The Real Cost of Owning Gold

Monday, June 4, 2012

The Real Cost of Owning Gold

Dealer Markups

To buy physical gold from a dealer, you'll pay a premium above its market, or "spot" price. This markup decreases by weight, ranging from as high as 35 percent for a 1/20th of an ounce Gold Maple Leaf coin to as low as 0.4 percent for a 400 oz. bar of gold recently at Kitco.com. The typical premium is in the 2 percent to 5 percent range for bars, but it's higher for coins because of fabrication costs. Premiums on rare collectible coins can be virtually unlimited, depending on their scarcity, condition and the dealer's profit motive.

Transporting Gold

Gold deliveries must be insured, with the cost varying by value, weight and destination. Shipping a 1 oz. gold bar from New York to California might cost from $30 to $50, says Kitco's Hug, which comes to a 2 percent to 3 percent cost over the current $1,576 spot price. If the shipment is worth more than $100,000, Kitco requires an armored truck and will deliver only to a bank or Brink's vault, not a home. That delivery costs more than $1,200.

Storing Gold

If you want to store your gold in a vault, it will typically cost from 0.5 percent to 1 percent of the gold's value per year. Storage costs include insurance, in case the gold is stolen or lost. You can also put your gold in a bank safe deposit box, although it won't be insured because this is considered separate from your bank account. If the bank goes bust, it may take some time to extract your gold from behind locked doors. Safe deposit boxes vary in cost, according to size, and can even come free with some bank accounts.

Securing Your Gold

If you decide to store gold at home, you may want a safe. For $88, Walmart sells the SentrySafe MS0100, a 0.8 cubic foot, fire-resistant model that weighs 87 pounds and can be bolted to the floor. (That's a smart move because otherwise you may be providing thieves a handy carrying case.) On the extreme end of the spectrum, you can buy one of only 30 Dottling Narcissus safes for about $340,000. Designed by Karl Lagerfield, the Narcissus is 6 feet tall, weighs 1,760 pounds and has electronic owner-recognition technology, plus a shiny, mirror-like surface so you can admire yourself.
Insuring Gold
Most home insurance policies won't cover more than $1,000 of gold. Unlike fine jewelry, gold is considered currency by insurers because of its fungibility. They don't like covering it because if stolen, gold can be melted and sold. Some will cover coins as collectibles with a "personal articles" rider. Ace Group, an insurer that covers coins and bars, charges between $1 and $1.50 per $100 of gold, depending how secure your house is. Insuring gold means someone knows you have it, though. For gold bugs who fears Armageddon and big government, this defeats the purpose of owning physical gold. The IRS can subpoena insurance records.


To sell your gold, you may need to get it appraised, or "assayed," to verify that it's genuine. This depends on the amount and kind of gold you're selling and the relationship you have with the dealer. If you're selling gold back to the dealer from whom you bought it, such formalities may be unnecessary. Coins that are hard to counterfeit often don't need it. Big bars often do. Assays can cost about $100. Insurers also require appraisals of gold coins, which can run anywhere from $100 to $1,000, depending on the size and value of the collection.

Taxes on Gold (Not applicable in Malaysia)

Unlike stock capital gains, which are taxed at a maximum rate of 15 percent for long-term investors, profits on gold investments are taxed at a maximum 28 percent rate, as collectibles. However, if you are in the lower 10 percent, 15 percent, or 25 percent income tax brackets, your net long-term gains from gold are taxed the same as your income. One thing to consider is that gold stocks may offer better value for taxable investors; they are subject to the lower 15 percent capital gains rate.

Opportunity Costs

With interest rates near zero, bank accounts and CDs yield virtually nothing. If rates were to rise to 6 percent, would you still want to own your gold--which yields nothing? "Low interest rates make for a strong gold price because the opportunity costs are little," says Adrian Ash, head of Bullion Vault, a London-based gold dealer. "The critical thing is to see how interest rates are relative to inflation. Having cash pay nothing versus 2 percent inflation makes gold almost a no-brainer." If rates exceed inflation, the opportunity cost of owning gold may be too high.

Guns and Gold (Not applicable in Malaysia)

Guns and gold go together like peanut butter and jelly. So common is the gun-gold connection that the National Rifle Association recently began airing a "Guns & Gold" TV show, a kind of "Antiques Roadshow" for numismatists who like to shoot things. Financial analysts study sales of both weapons and gold to measure fear in the markets. What's more, people with gold in their houses tend to want to protect it. Hardcore gold bugs who believe the apocalypse is nigh may want at least one assault rifle to fend off whatever threats they foresee. For more moderate buyers, a Glock Generation 4 semiautomatic handgun costs $619.99 at Cabela's.


Ever see "Treasure of the Sierra Madre?" Hoarding gold at home can make you paranoid. But even investors who don't keep their gold at home tend to worry. "There's no doubt in my mind that if gold goes as high as I think it will, the government will confiscate it," says Tobina Kahn, a Chicago-based jeweler. Kahn's clients are so angst-ridden about the potential for a socialist Guignol that some now favor diamonds over gold, which they consider less likely to be confiscated. "They ask how many diamonds fit in a suitcase," she says.

Alternatives to Gold

There are cheaper alternatives to physical gold. An exchange-traded fund such as iShares Gold Trust holds bullion in foreign vaults for investors at a cost of 0.25 percent of assets a year. For those worried about government confiscation, owning gold in vaults outside the U.S. makes more sense, says Ash at Bullion Vault. The company has an electronic brokerage that allows investors to trade close to the spot price, keeping their gold in segregated accounts. It insures and stores gold in vaults of your choice in Zurich, London or New York for $4 a month.


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