How to buy gold

The best way to buy gold is in the form of high karatage gold jewelry.

• The markup is low. You can buy 23k or 24k gold in Asia at around 4% over the spot price of gold. Hallmarked jewelry sold in the West has markups as high as 300 - 400% above the cost of the materials used to make it and could never be considered an investment.


• Owning gold in the form of jewelry means you can use and enjoy it. Its a cost effective way to flaunt your wealth - you can't wear your share certificates to your friend's party! Even if the gold price does not go up or declines, you have still got something out of it.
  
  
• Jewelry that you are wearing is not subject to customs duties or exchange controls. This is useful if you need to get money into or out of the country.
  
  
• Gold jewelry is unlikely to be subject to government confiscation. This might seem unlikely in this day and age but its worth remembering that in 1933, Presedent Roosevelt ordered U.S. citizens to surrender all their gold coins, gold bullion and gold certificates to the Federal Reserve. Gold jewelry was exempt.
  
  
• There is no paper trail in the ownership of gold jewelry. If you give your gold jewelry to your heirs there is no tax liability.

How not to buy gold

Exchange Traded Funds

It is possible to buy shares in a gold ETF called GOLD, which has the ticker symbol GLD. The shares are priced at the mid point between the buying and selling price of the spot price of gold.

There are several disadvantages to this way of owning gold.   Firstly while the expenses of the gold ETF are low, the Trust will have to sell part of its gold stores to pay these expenses.  Thus, over time, the fractional amount of physical gold represented by each share will decrease. Indeed it is not clear how much, if any, gold the Trust actually possesses as it is never audited.

Secondly, the tax treatment of GLD is unfavourable. In the US, exchange traded funds that invest in metals do not qualify for the 15% rate on long-term capital gains. Instead their top top tax rate is 28% as the fund's investors are deemed to own a share of the metal. The gain is treated as coming from the sale of a collectible.

Futures and Options

The principle futures contracts are YG, YI, ZG GC and SI.You can also buy and sell options on these contracts.

Derivatives are remarkable in that literally everyone without exception loses money on them: buyers, sellors, small retail investors and giant hedge funds and banks. Being an expert won't help much either. Myron Scholes and Robert C. Merton, who won the 'Nobel' prize for economics for their work in developing the Black-Scholes formula for pricing options, were on the board of directors of Long-Term Capital Management which lost 4.6 billion in less than 4 months dealing in options.

There are more enjoyable ways of losing money.