The falling price of gold may present a tax planning opportunity for investors. As accountants meet with their clients to discuss year-end tax strategies, holders of “paper gold” (e.g., ETF, Futures, Fund or managed account allocation) have an opportunity to change their form of ownership to physical gold (bullion or coins) if their position is now at a loss.
To do so, paper gold holders should sell to recognize their loss and use the proceeds to purchase physical gold bullion and coins. We believe this strategy would not qualify as a wash sale which the IRS defines as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security. Any investor thinking of deploying this year-end tax planning strategy should speak with their tax advisor before doing so, but this “trading paper for physical gold” strategy does not entail selling a security in order to buy a “substantially identical” security.
With gold currently at a price not seen in over four years, investors are wondering if the right time to buy is now. For many, the decision to buy gold is not very different than buying stock in an individual company; it is a tactical decision based on a belief that it will increase in value. While holding gold may be tactical for some, our belief is that it should be “strategic” for all and a core part of an investors’ portfolio. Owning gold today has the same diversification benefits as it has for centuries, only today it is less expensive and hence of greater value in building an all-weather portfolio.
As a “foundation” asset, gold can protect a portfolio from the unknown unknowns (e.g., the rise of ISIS, Ebola scare) and systemic risk, but also benefits from the tremendous global demand for physical gold (especially in the developing world). Being able to recognize a loss for tax purposes in 2014 and still maintain a position in physical gold, is a strategy gold investors should consider as 2014 comes to a close.