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In the midst of a volatile market, many investors are turning to precious metals to add stability to their portfolios. Gold and other precious metals are a low-risk investment option that is appealing to most people.
There are many different options for investors interested in gold and precious metals including: gold IRAs, gold ETFs, gold mining ETFs, and gold futures. But what option is best for you?
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Gold Investing with ETFs
What is a Gold ETF & How Does it Work?
A Gold Exchange Traded Fund (ETF) is a type of open-ended mutual fund that is based around the fluctuations of physical gold prices. Gold ETFs hold gold derivative contracts that are backed by physical gold.
Rather than the direct purchase of physical gold or a physical gold IRA which does not generate an income, a gold ETF is like other investment portfolios that will show returns over time. If you're looking for a gold IRA rollover guide to invest in ETFs on its own, look over my how-to guide.
As with other mutual funds, investments are managed by an asset management company (AMC), and return on investment is determined by the amount of the initial investment.
Gold ETF vs Gold Futures
A Gold Exchange Traded Fund (ETF) is a mutual fund that is managed by an asset management company (AMC).
A Gold Future is an agreement between two parties, where the buyer agrees to purchase a quantity of gold at a predetermined price at a set future date.
A major difference between gold ETFs and gold futures is the required fees and taxes associated with each.
The taxes and fees associated with trading gold ETFs often make it the more expensive option as taxes on gold futures are split between short-term and long-term capital gains and there are no management fees.
However, gold ETFs produce an income over time.
Gold ETF
- Mutual Fund
- Long term capital gains tax
- More profit
Gold Future
- Gold purchase
- Taxed as 60% long term gains & 40% short term gains
Gold ETF in IRAs
The IRS has determined that gold ETFs are an option for individuals that wish to invest in precious metals but do not want to deal with the legal requirements of purchasing and storing the actual physical metals.
An IRA may include shares in a gold ETF.
There are certain requirements in place that determine the specifics of what types of precious metals an ETF may invest in including metal purity standards.
Augusta Precious Metals
Augusta is the leading provider of Gold and other precious metal IRAs. They offer exceptional customer service and diversification options for their clients.
How Do I Find a Good Gold ETF?
A good gold ETF is reputable, has affordable management fees, and is managed by industry experts that are committed to the success of their investors.
Many companies are trusted and well-reviewed qualifying them as excellent choices. The best choice for a gold ETF will reflect the investor’s long-term goals and each situation is different.
Gold ETF Taxation
As with most investments, gold ETFs are taxed. How they are taxed is dependent on several factors. Short-term capital gains are taxed as ordinary income.
If the gold ETF is held for more than a year before being sold then it becomes long-term capital gains.
If the gold ETF is held in an IRA then taxation is the same as any other IRA and nothing is taxed until you begin to make withdrawals.
Do Gold ETFs Hold Physical Gold?
Not all gold ETFs are backed by the same types of physical gold. Some gold ETFs are traded on stocks of physical gold and build an ongoing income. These exchange traded funds don't need to worry about storage like physical metals need in a gold IRA depository.
Physical gold ETFs are backed by physical gold bullion, bars, and coins that are managed and stored in IRS-approved vaults by the AMC.
Gold miner ETFs are an investment into a gold mining or gold refining company rather than in physical gold itself.
Physical Gold ETF
A physical gold ETF is a type of ETF where the AMC holds physical gold in the form of bouillon, coins, and bars on behalf of the investors.
Like other ETFs, the investors hold a proportional share of the physical gold held in the vault based on the current gold cost.
A physical gold ETF hopes to build value by spot tracking the gold prices. A physical gold ETF’s value varies depending on the value of the currently held assets.
Gold-Backed ETF
A gold-backed ETF is another term for a physical gold ETF.
Gold-backed ETFs, as the name suggests, are ETFs that are backed by physical gold that is stored and managed on behalf of the investor by the AMC.
A gold-backed ETF seeks to build value by tracking the spot value of gold prices.
Can I Hold a Gold ETF in an IRA?
Unlike many purchases of precious metals that would be classified as collectibles, gold EFTs can be held in IRAs. Gold EFTs invest only in gold bouillon that meets IRS purity standards for IRA investment by purchasing gold of 99.5% purity. Gold ETFs held in an IRA are backed by physical gold that is stored and managed by the AMC.
How to Invest in Precious Metal ETFs
Investment in any precious metal ETF, including gold, is no more difficult than making other types of investments.
The best way to invest in precious metal ETFs is through an IRA.
If you don't invest through an IRA, The investor must have a Demat account before purchasing shares in a gold ETF. After the Demat account is opened, the next step is to choose a gold ETF company through which to make their purchases. Once the purchases are made the investor will receive a confirmation that the transaction is completed.
What is a Gold Miners Exchange Traded Fund?
While many gold ETFs invest in physical gold there are some that purchase stocks in companies that are engaged in gold mining or gold refining.
A gold miner's ETF does not track the cost of physical gold commodities but instead tracks the cost of gold mining stocks.
Gold miners' EFTs are a viable alternative to physical gold ETFs based on a different aspect of the precious metals market.
Investors can buy into the precious metals market which is less volatile than other markets but the investment is in the company itself rather than the commodity.
Are Gold ETFs Safe?
Gold ETFs are typically a safer option than investing in traditional stocks and bonds.
Investment in the gold market is considered to be a low-risk investment that is appealing to many investors. Conservative investors can feel secure in the knowledge that their investments are put towards 99.5% purity standard gold bullion.
The cost of gold may fluctuate but the fluctuation is less intense than other investment opportunities. In a volatile market, the value of gold usually increases. It is important to remember that physical gold will always maintain value.
How Do They Make Money?
A gold ETF makes money directly in relation to the cost of physical gold.
Because the gold ETF holds physical gold the value of the ETF rises and falls with the cost.
Gold ETFs are usually managed similarly to trusts so that a certain number of gold bars or bouillon is allocated to each investor in proportion to the value of their investment.
Gold ETFs make money when the value of gold increases.
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Which is Better: Gold Fund or Gold ETF?
The Short Answer:
Gold ETFs
The Long Answer:
Gold mutual funds and gold ETFs are very similar investment options with a few key differences. Gold ETFs invest in either physical gold or in companies engaged in gold mining or refining.
A gold mutual fund is an investment structure that is based on a fund of fund structure. Gold mutual funds will often invest in gold ETFs as an underlying asset alongside other options.
Both options are appealing to low-risk investors but the gold ETF is a more direct and concise option.
What is the Safest Gold Exchange Traded Fund?
The safest gold ETF is one involved with a gold IRA with Goldco.
There are advantages and disadvantages to gold ETFs but involvement with a safe and reputable company is vital. However, it's tough to find a good company that will invest with anything under $5,000.
Goldco has years of experience in the precious metals industry. They have won many awards and commendations from industry ratings companies and are both trustworthy and well respected.
How to Invest in a Precious Metal ETF Through an IRA
Goldco is a brokerage company that aids investors in setting up self-directed IRAs. Their customer service agents assist investors in the process of setting up the IRA account.
They will also assist in rolling over your 401(k) without penalties, existing IRA, and other retirement accounts into a new IRA account. Once the account has been set up then the investor is able to purchase shares in a gold ETF that are IRS compliant.
Goldco’s agents are subject matter experts and ensure that all gold meets the IRS requirements for purity as well as ensuring all storage and custodial requirements are followed.
The shares are then held as a part of the IRA account.
In Conclusion
Gold ETFs are a low-risk, practical investment opportunity.
Gold ETFs avoid the hassle and fees associated with purchasing gold and other precious metals outright.
This makes gold ETFs a great option for investors that are looking to diversify their portfolio and branch into the precious metals market.
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About Me - Peter Anderson
Thanks for stopping by.
I started this site in 1996 and have been investing for over 30 years. Now that my retirement is creeping up on me, I’m fully focused on securing my wealth. Inflation is extremely high, and we must protect ourselves and our families. Husband and father to two (big) kids and 5 beautiful grandkids.
