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Originally published Saturday, April 2, 2011 at 10:02 PM

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Your Funds

Finding the right vehicle for gold

People who invest regularly in gold typically have a strong preference, but for average investors, the question of which way to own gold typically comes down to convenience, liquidity, volatility and goals.

Syndicated columnist

The current economic situation, coupled with world and national politics, has investors asking questions.

Here are a few recent queries from readers.

Q: I've decided it's time for me to invest in gold. I've always been afraid to do it, but I can't ignore it anymore. My problem is that I'm not sure the best way to do it. Should I buy a gold fund or ETF, or buy gold coins or ingots? Is a fund as safe as holding the gold myself?

A: People who invest regularly in gold typically have a strong preference, but for average investors, the question of which way to own gold typically comes down to convenience, liquidity, volatility and goals. There is no one right choice.

Buying gold directly has different risks than buying a fund. There is dealer risk — the potential for an unscrupulous seller — and liquidity risk that a fund investor doesn't face. Funds can always be sold on demand; while there will always be a market for physical gold, an investor can't necessarily sell on a moment's notice at the current market price.

There can also be storage and maintenance costs when you own physical gold yourself.

Meanwhile, in most traditional funds an investor isn't buying gold so much as buying mining stocks. Some gold funds specialize in major mining stocks, and others zero in on the junior players, effectively creating more leverage and volatility. (You can also buy gold stocks directly, or buy and sell options, although those probably aren't the right strategies for someone making a first foray into precious metals.)

Then there are exchange-traded funds like the SPDR Gold Shares (GLD) or the iShares Gold Trust (IAU), which are backed by physical bullion. Bullion is a nonearning asset, meaning it pays no dividends and is worth only what someone else will pay for it. That can make the ETFs volatile, thus harder for average investors to ride with if they look at short-term movements.

"If you're buying gold because your premise is that the world is coming to an end, you don't want any paper, you want to buy the gold directly," said Russel Kinnel, director of mutual-fund research at Morningstar. "If you're looking to make an asset allocation into gold, then a fund or ETF makes the most sense. You're not worried about safeguarding your gold, and it's a low-maintenance way to be invested for a long time, but (you) have the ability to sell anytime you need to get out."

Tax issues on gold funds make some experts prefer a traditional fund for taxable accounts, but gold ETFs for tax-advantaged retirement accounts.

"Most people who say 'I want to own gold' aren't really thinking 'I want to own mining stocks,'" said Kinnel. "That doesn't mean they can't get comfortable with the idea; it just means they should understand what they want to buy and what they're actually getting."

Q: Is the market too freaked out about events in Japan?


A: Most fund managers I've talked to since Japan was rocked by an earthquake and tsunami say the tragedy won't diminish the long-term value of international stocks. That's typical of natural disasters.

Normally, the market reacts to future forecasts more than current realities, so you would think that the market would ease up, since managers think this won't put a long-term hurt on stocks. Instead, the market is reacting to every new video showing the human toll and physical devastation, and to every story about nuclear-radiation concerns.

If that is "too freaked out," then maybe the market has overreacted. That just means it will bounce back harder at the first sign of recovery and rebuilding.

Q: I held a mutual fund into 2011 to avoid a tax issue, and now my broker says I have one anyway. He doesn't have my cost on the fund because I bought it from a different guy and a different firm. He says I'm responsible for determining my costs and profits, and I don't have those papers anywhere. What do I do?

A: New cost-basis legislation went into effect in January that requires brokers to report a client's cost basis to the Internal Revenue Service. Investors are responsible for calculating and reporting their cost on any security purchased before January.

That's not really much of a change, and it sounds like the broker was just saying he didn't have the numbers — or the responsibility — to help. That's exactly the same situation you would have faced if you sold last year.

Since you can't find the paperwork, call your former broker's firm to see if they have records. Lacking that — and since your fund was with the broker, the fund itself is unlikely to be of any help — try to determine roughly when you bought the fund and use the average price from that year.

Your responsibility to the IRS is for a good-faith estimate, not the original paperwork; you must merely come up with a cost number that makes sense (and that you can defend in the event of an audit).

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at or

Box 70, Cohasset, MA 02025-0070.

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