During periods of extreme inflation or deflation, gold has proven itself to be an investment alternative worth looking at and, recently, gold has started to outperform once again.
Whether it be fear that the U.S. government is printing too many dollars or that investors just want to add protection to their portfolios, it is important to understand the various choices one has in gold exchange traded products.
First, there are the ETFs which physically hold gold bullion. These ETFs are taxed as collectibles at a long-term capital gains rate of 28%. ETFs that hold physical gold are the SPDR Gold Shares (GLD, $32 billion in assets), the iShares COMEX Gold Trust (IAU, $2.5 billion in assets) and, the newcomer, ETFS Physical Swiss Gold Shares (SGOL, $129 million). Were GLD a country’s central bank, it would rank sixth in the world, recently surpassing Switzerland, in its gold holdings. Some may find IAU more attractive than GLD due to its smaller and less conspicuous (although not “small”) market footprint, whereas SGOL provides diversification regarding the country in which the metal is warehoused.
Secondly, there are ETFs which hold futures contracts in gold. These include PowerShares’ DB Gold (DGL), Ultra Gold ProShares (UGL) and UltraShort Gold ProShares (GLL). All three are organized as partnerships and are taxed as futures, that is 60% as long-term capital gains and 40% as short-term capital gains. DGL is unique in that it aims to minimize losses from contango and maximize gains from backwardation by placing its holdings in one of any 13 months (front month plus 12) rather than maintained in front-month futures only, as are UGL and GLL. DGL is an unleveraged play, whereas UGL and GLL are both levered ETFs aiming to deliver twice the daily change in gold prices.
Thirdly, gold can be accessed through exchange traded notes, ETNs, which are debt instruments that track an index. From a tax perspective, they are currently subject to the 15% long-term capital gains rate with holding periods of longer than one year. These ETNs enable investors to short the gold market or grab leveraged exposure to it. Here are four gold-related ETNs:
- PowerShares DB Gold Double Short ETN (DZZ)
- PowerShares DB Gold Double Long ETN (DGP)
- PowerShares DB Gold Short ETN (DGZ)
- E-TRACS UBS Bloomberg CMCI Gold ETN (UBG)
Lastly, one can gain exposure to gold through gold mining stocks, via the Market Vectors Gold Miners ETF (GDX). GDX currently holds 31 different gold mining stocks, offering company diversity, and carries an expense ratio of 0.55%; it is taxed using the traditional short-term and long-term capital gains rates.
There are wide-ranging choices when it comes to investing in gold, but keep in mind tax treatments and risk appetite when choosing which ETFs or ETNs are right for you.
