I drive men mad for love of me.
Easily beaten, never free.
What am I?
Why, you’re gold, of course.
Indeed, the metal is many things to many people. But one thing it’s not: money.
That comes as a surprise to some people.
Over the years, in reader letters about acquiring, transporting or storing gold, I’ve noticed that many folks assume gold to be money. From that they extrapolate to all sorts of false conclusions about how they should manage their ownership of the metal.
Some even miss out on major opportunities as a consequence.
Gold isn’t money … and that makes an enormous difference when it comes to wealth management strategies… So if gold isn’t, then what is money?
What Is Money … and Why Does It Matter?
Those of you with an interest in bitcoin probably know about the long-running debate over whether the virtual currency is a form of money or a nonmonetary asset.
Government agencies, the IRS and the courts have all grappled with this issue of what is money from time to time. It’s important for several reasons … all of which apply equally to gold bullion.
What is money? Money — currency, a legal tender issued by a sovereign authority like the U.S. government, including face-value gold coins — isn’t regarded as an asset. It’s just a store of value, a unit of account and a means of exchange.
Because governments issue money, governments have a unique interest in keeping tabs on it … such as when you take it into or out of the country, or store it in a foreign financial institution, or use it for a large transaction. That’s why they impose such stringent reporting requirements on it.
On the other hand, governments don’t normally tax appreciation in the value of money. If you have an account denominated in Swiss francs and its value increases vis-à-vis the dollar, boosting its buying power, it’s not considered a capital gain.
The same would apply to bitcoin, or gold, if they were considered forms of money … hence the debate about “what is money?”
The Bullion Advantage
But bullion gold — gold that hasn’t been minted into legal tender coins, which is treated as money — is an asset, not money, and that matters … a lot.
Let’s review some of the key differences.
- Purchases of gold bullion aren’t reportable to the U.S. government. Many people think they are. That’s because if you pay with cash or a cash equivalent for $10,000 or more worth of bullion, the dealer must submit IRS Form 8300, “Report of Cash Payments Over $10,000 Received in a Trade or Business.” This requirement, however, isn’t specific to precious metal purchases. It applies to all cash transactions over $10,000, no matter what you’re buying. If you buy bullion with a credit card, there’s no need to tell Uncle Sam.
- You don’t have to declare gold bullion when you bring it into or take it out of the U.S., the way you do with currency. Admittedly, this is a tricky issue, and many people advise you to play it safe and declare it anyway to avoid trouble. But technically, gold bullion is just like any other personal property — furniture, a car, etc. — and cross-border movements don’t have to be reported if the value exceeds $10,000, as is the case with any form of currency (including legal tender gold coins).
- You aren’t obligated to report gold stored outside the United States. Whether you keep it in a safe-deposit box or a private vault, gold bullion is considered personal chattel property — an asset no different from jewelry, artworks or any other valuable thing. By contrast, if you keep money in a foreign financial institution, you’re faced with all sorts of onerous reporting requirements, such as the Report of Foreign Bank and Financial Accounts (FBAR) and the Foreign Account Tax Compliance Act (FATCA).
- You report and pay capital gains taxes on gold sales — but can also deduct losses. The IRS classifies gold billion as a collectible. That means profit on its sale can be taxed at the maximum capital gains rate of 28%. The actual rate you pay is determined by the amount of time you’ve owned it and your ordinary income tax rate. You’d report capital gains from gold sales on Schedule D of Form 1040 and pay the tax when you file. By contrast, if you sell gold bullion at a loss, it may potentially offset other capital gains or even ordinary income.
The Universal Asset
Looking at gold bullion as an asset rather than a financial instrument illuminates its role in wealth management strategies.
Lots of people speculate successfully on price movements in gold. Some even invest in funds like the SPDR Gold Trust (NYSE Arca: GLD). (Although that doesn’t count as owning gold in my book — it’s just paper.)
But by far the bulk of the world’s gold bullion is doing precisely what assets should do in any smart wealth-management strategy: storing value securely over the long term as a hedge against the slings and arrows of markets in financial instruments such as stocks, bonds and the like.
Gold bullion is the ultimate “set it and forget it” strategy. If you haven’t “set it” yet by accumulating some of the yellow metal that “drive[s] men mad for love of me,” now’s the time to start.
Editor, The Bauman Letter
P.S. Another avenue for adding physical gold to your portfolio is the EverBank non-FDIC insured Metals Select® Allocated Account. It’s a great way to increase your own economic power. It allows you to purchase specific coins and bars, and it’s even IRA eligible (gold and silver American Eagle coins only).
For the sake of full disclosure, we receive a marketing fee based on our relationship with EverBank. But, honestly, we’d work with them regardless.