Client Investments: Pros and Cons of Buying Goldby
As their accountant, you hope your clients ask for financial and tax advice from time to time before doing something they might regret. If one day your client announces, “I’m thinking of investing in gold,” what advice would you share?
For years, gold has been a commodity representing portable wealth. Even going back to ancient times, if a country’s currency and stock market collapsed, you could pack up your gold and migrate elsewhere. It was a universal currency.
Gold would fit into the alternative investment category for clients seeking to diversify away from stocks, bonds, and cash. It would even be considered a commodity, like oil. Traditionally it’s been considered a hedge against inflation. It also has been considered a safe haven in times of global unrest. For people concerned about how much the government knows about them, it can be tucked away in a safe-deposit box.
How Do You Invest in Gold?
Late-night TV often features ads for gold coins. The ads trumpet the virtues of ownership ahead of an economic collapse they are predicting. This is a bad way to buy gold. Jewelry is not an attractive route either, unless you are buying at auction where it often sells for close to scrap value. (Don’t forget those buying and selling commissions.)
People often see the price of gold on financial websites or news programs ($1,272.40 an ounce as of Oct. 31, 2016) and use that as a benchmark. Pure gold is 24 karat. Jewelry is often 14 karat or 18 karat, meaning it’s alloyed with another metal for strength. This might be silver or copper. As an accountant, you know percentages: 14-karat gold would be 58.33 percent pure gold, implying a value of $742.19 an ounce, using the value above.
It gets more confusing. Gold is measured in troy ounces, equivalent to 31.1034768 grams (1.097142857143 ounces), about 10 percent heavier than a standard ounce. Put another way, there are about 14, not 16, ounces to our familiar pound measure.
Your client wants to invest in gold. If she is content with owning a security, there are exchange-traded funds (ETFs). This can make diversifying as easy as buying an index fund. Another way is to buy the actual metal in ingot form. In this case, you are dealing with a bank or bullion dealer. Gold coins, like Krugerrands, are another option. They have the advantage of being smaller than an ingot, if you only want to sell a portion of your gold later on.
So, why do clients want to buy it? If it’s a routine portfolio diversification, ETFs might be the best route. If they want gold they can hold and hide, they are talking coins or bars.
What Are the Pros and Cons?
Gold is a legitimate investment. If your client is seeking to diversify her investments, it has its pros and cons.
Here are some pros:
1.It’s physical. Some people like investments they can touch. They can take possession.
2. Inflation hedge. It’s theoretically the reason people buy it.
3. Safe harbor. In times of serious world strife, it’s thought to hold its value.
4. ETFs. You can gain many of the appreciation benefits of gold ownership without taking physical delivery. ETFs have built-in costs, too.
Here are some cons:
1. Authentication. Unlike breaking a dollar into four quarters, the person or firm you choose to sell it to will want to verify it’s the real thing.
2. Proof of ownership. Gold gets stolen all the time. It can be melted down and remolded into something else. Reputable dealers will want to know it really belongs to you. Purchase receipts might help.
3. Markups. The business you buy from needs to make a profit. You need to know how they do it. What are their fees and commissions?
4. Storage. You take on lots of responsibility when you store it yourself. You may want to keep it in a safe-deposit box at a bank or another depository institution. This comes with a cost.
5. No dividends. Unlike total return stocks or certificates of deposit, gold just sits there. It doesn’t pay any income. You might consider buying stock in a gold mining company that pays dividends, but that takes you away from owning the yellow metal.
6. Forgetfulness. You’ve heard stories about older individuals who didn’t trust banks. They bought gold and hid it. Their heirs are still tearing the house apart looking for it.
Gold is a legitimate investment, but clients need to have their eyes open when buying it. They need to know the actual value of what they are getting.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.