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Commodity ETFs: A Vastly Improved Way to Buy Gold

When, in November 2004, State Street Global Advisors introduced the first gold ETF, it was a truly revolutionary moment. You buy a share just as you would buy a share of any other security, and each share gives you an ownership interest in one-tenth of an ounce of gold held by the fund.

Yes, the gold is actually held in various bank vaults. You can even see pictures of one such vault filled to near capacity (very cool!) at SPDR Gold Shares website.

If you are going to buy gold, this is far and away the easiest and most sensible way to do it.

You currently have several ETF options for buying gold. Two that would work just fine include the original from State Street — the SPDR Gold Shares (GLD) — and a second from iShares introduced months later — the iShares Gold Trust (IAU). Both funds are essentially the same. Flip a coin (gold or other), but then go with the iShares fund, simply because it costs less: 0.25 percent versus 0.40 percent.

Strange as it seems, the Internal Revenue Service considers gold to be a collectible for tax purposes. A share of a gold ETF is considered the same as, say, a gold Turkish coin from 1923 (don’t ask). So what, you ask? As it happens, the long-term capital gains tax rate on collectibles is 28 percent and not the more favorable 15 percent afforded to capital gains on stocks.

Holding the ETF should be no problem from a tax standpoint (gold certainly won’t pay dividends), but when you sell, you could get hit hard on any gains. Gold ETFs, therefore, are best kept in tax-advantaged accounts, such as your IRA. (This strategy won’t serve you well if gold prices tumble and you sell. Then, you’d rather have held the ETF in a taxable account so you could write off the capital loss.)

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