Are precious metals the best investments?

by Jim Sloan

The price of gold hit a record recently as anxiety over the debt crisis in Greece and the protracted uncertainty over the United States' debt ceiling sent banks and investors racing to the security of the precious metal.

According to Reuters, global central banks have been stocking up on gold in an effort to diversify from the dollar, and as a safe haven from the inflation many are expecting to see in places like China. Converting dollars into gold for these financial institutions could be like putting money into a high interest savings account.

While common sense says the price of gold is likely to adjust downward from its lofty perch, a recent poll by Reuters found that more than half of the investors surveyed expect gold to hold much of its value in the near future; respondents said prices will average $1,575 an ounce in the coming year, way up from the $1,453 average predicted in January.

But does this mean gold is one of the investments you should make in this uncertain market. Is it better than the best savings accounts or money market accounts? Not necessarily.

Disadvantages of investing in gold

Although gold prices have been increasing steadily in the last three years during the global financial crisis--making precious metals appear to be good investments and an attractive way of increasing your returns the way a certificate of deposit or other investment tool might--Forbes magazine warns that gold prices often don't correlate to equity markets. In this sense, gold investments serve best as a way to reduce your portfolio's risk than as a means of increasing profits.

Forbes also notes that gold isn't like stocks or bonds, where you can get a return for risking your money with a particular enterprise that produces a valued good or service. Gold doesn't have a great deal of industrial value, and as a commodity, its value is limited--unless paper money is rapidly losing its value.

Buying up gold in physical chunks, such as bullion, makes the metal a collectible in the eyes of the U.S. government, and that means it's taxed at 28 percent rather than the 15 percent you pay for profits on financial securities.

How should you turn gold into a good investment?

If you want to diversify your investments with precious metals or other commodities, Forbes recommends that no more than 10 to 20 percent of your portfolio goes into commodities like gold, silver, petroleum or food. Think of it as a long-term investment and a way to reduce risk--not necessarily as a short-term money-making strategy.

You can make these investments by purchasing the commodity directly or by investing in companies that deal in them. Another method is to buy commodity ETFs, which track the price of the commodity and issue you a security. But these are also considered collectibles and are taxed at 28 percent.

The pressure to buy and sell gold

There are, of course, ways to buy gold directly and store it yourself. eBay now supports an online gold and silver marketplace, and sales have grown 60 percent since 2007. You can buy coins, bars and other pure metal iterations online.

You can even buy gold bullion from vending machines, although according to Forbes, you'll have to go to Las Vegas or Germany to do that, and the commission fees are pretty steep.

Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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