Gold's Pullback Offers Investors Opportunities


The economic turmoil rocking Europe has been fueling the price of gold. The shiny metal, considered a safe haven investment, could be on track to hit $1,200. The largest gold ETF backed by bullion, the SPDR Gold Trust (GLD), has been surging, hitting five-month highs this week despite the announcement of a $146 billion bailout package for Greece.

However, during Tuesday trading,gold fell from its five-month high as the dollar strengthened, creating an opportunity for bullish gold investors. Gold futures for June delivery fell 1.2% to $1,169.20 an ounce.

"Right now, there are two factors driving the price of gold to record highs," says Mark Sachs, president of Lind-Waldock, a futures brokerage firm. "A sovereign debt crisis in the Eurozone and speculation that the global monetary stimulus measures of the past year and a half are going to result in inflation."

Another reason investors like the yellow bullion: It's a tangible asset that always has value. After many investors were clobbered in the stock market, gold is now seen as an attractive way to diversify a portfolio. It's also free from counterparty default risk, but unlike real estate, it trades in a deep, liquid international market. It's not a hard sell: Gold has performed extraordinarily well as an investment over the past decade. The price of gold has risen for nine straight years and was up 24% in 2009.

Gold ETFs Are Popular But Risky

If you think gold should be part of your portfolio, you can take possession of the bullion (a logistical hassle) or consider buying an exchange traded fund. By far, the most popular gold ETF is the SPDR Gold Trust (GLD) which actually holds positions in gold bullion and, as a result, carefully tracks the spot price of gold. When you buy a share of GLD, you are buying one-tenth of an ounce of gold less expenses -- such as a fee to lock up the gold in a vault.

But before you decide to buy into a gold ETF, there a certain risks you should understand:

  • Know that some gold ETFs do not have all their reserves in gold bars, locked up in a vault. Instead, they are backed by contracts which track the spot price of bullion but also can deviate from the price. An example of these is Powershares DB Gold Gund (DGL).

  • Some gold ETFs, especially those that own gold bars, are subject to tax treatment as "collectibles" putting long-term gains in the 28% bracket, compared to 15% for capital gains elsewhere. However the short term gains are the same as for other investments: your income tax rate.

  • You could face higher rates and/or penalties of 10% if investments deemed "collectibles" are included in an IRA or other type of self-directed retirement accounts.

  • Gold ETFs are exposed to company risks that may have nothing to do with the actual value of gold.

  • A meltdown in emerging markets could eliminate a large chunk of global demand for commodities, including gold.

  • In a sustained bull market, where essentially all asset classes are doing well, using gold as a hedge in that environment would have little value.

Gold Futures

If all this deters you, consider gold futures instead. This is a more straightforward approach and investors don't need to worry about fees and unusually high taxes. If you think the price of gold may drop, you can still participate in the market and profit from that view taking a short (bearish) position in a gold futures contract. Or you can use options on futures to hedge an existing position you might have in gold futures, in the event prices are expected to fall.

Another benefit is that commodity futures trade nearly 24 hours a day on an electronic marketplace.

As for Uncle Sam, futures are lumped together and reported on a single Form 1099 at year-end, and any profits in commodity-based futures (regardless of the holding period) are taxed at the "60/40" rate; 60% taxed at the favorable long-term rate and 40% at the short-term rate.

If you're not sure about ETFs or a futures-based strategy, you can still get in on the gold rush. One way: With a $1,500 minimum deposit, you can take advantage of EverBank's MarketSafe CD that provides 100% principal protection for five years and a return based on the change in the price of gold, silver and platinum. This would allow you to hedge your bet against inflation without risking principal.