Investing in Gold: Frequently Asked Questions

Excerpted from THE DOLLAR MELTDOWN: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments.

Question: What are the current reporting requirements for gold buyers? Can I deal in cash?

ANSWER: In general, your broker or dealer will report to the IRS any payment of cash, or series of payments that are related transactions, for amounts of $10,000 or more. This reporting requirement extends to the use of cash equivalents, cashier’s checks, money orders, and other monetary instruments, even if they are less than $10,000, as part of cash transactions. Increasingly precious metals dealers are refusing to take any cash in transactions.

Bear in mind, these reporting requirements are directed at the use of cash, and are not specific to the coin or bullion markets. In other words, the simple act of purchasing gold or silver is not a reportable event. Neither you nor your dealer is required to report purchases made with personal checks, bank wires, and cashier’s checks unless they are part of cash transactions described above.

When you sell precious metals to your broker, he is required to report some items to the IRS. The industry Council for Tangible Assets is a trade association of precious metals dealers. It advises its members to file an IRS Form 1099b when clients sell them certain gold, silver, and other bullion products, including one-ounce Krugerrand, Maple Leaf, and Mexican Onza gold coins, U.S. silver bags, and some bars. In general remember that you must report capital gains in precious metals as you would any other investment. Be sure to keep records of your purchases and sales for reporting purposes.

The IRS classifies precious metals investments as "collectibles," whether bullion, coins, or even in ETFs. That’s right, the IRS lumps them right in there with "any work of art, any rug or antique . . ." The tax rate for collectibles is 28 percent versus 15 percent for most long-term capital gains. (The government really doesn’t want you to own this stuff!) Contact your tax adviser for specific information.

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Question: Can I leave my gold and silver in storage with the dealer?

ANSWER: No. Don’t let your dealer hold on to your gold and silver. It’s not that your dealer may not be trustworthy, but too many people have lost too much doing that, either through mismanaged brokerages or through fraud. It’s an unnecessary risk, easily avoided.

Question: Then what do I do with it? Where do I put it?

ANSWER: Many people have a place to keep their gold in their homes. Others prefer to keep it locked up in a safety deposit box.

Question: But in the last chapter you raised the issue of confiscation and the possibility that safety deposit boxes may have to be opened in the presence of an inspector.

ANSWER: Anything can happen and it is useless to consider the possibilities when it is too late. For the time being safety deposit boxes may be safe. You are likely to be better off buying gold and keeping it in a safety deposit box if you must, than not having any at all. But do keep in mind that we have already experienced bank runs in the current crisis. Banks can close in the event of a monetary breakdown or a bank holiday.

Question: What about the risk of the exchange-traded funds like GLD being nationalized? That’s a lot of gold up for grabs.

ANSWER: The growing mountains of gold in exchange-traded funds may indeed be an attractive target for government plunder, even though the $35 billion in market capitalization of the two largest gold ETFs is not enough to make a dent in the government’s financial predicament.

But the real motivation for controlling people’s economic behavior is often actually for purposes of social engineering, and not financial at all. Issuers of fiat currencies are always hostile to gold and must suppress it at the first hint of a challenge. If a wholesale abandonment of paper dollars begins to build, it is to be expected that private gold stockpiles would become a target.

There is usually plenty of warning before command economies begin wholesale confiscation. In the 1930s gold coins began disappearing from circulation months before they were confiscated.

Question: How can you tell when something like that will happen? What are the warning signs?

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ANSWER: The governing authorities will do anything at all to keep themselves in power and to keep their game going. Watch the usual sources of revenue. Is it becoming harder for the government to borrow? Are new taxes failing to produce? If you are not under any illusions about what they will do, you’ll recognize the signs when they about to grab your gold.

Such actions are usually implemented under cover of a calamity: war, a devastating terror attack, economic collapse, civil disruption. Depending on the severity of the crisis, rather than confiscation, the authorities may find it more expedient to use onerous taxation to profit from private gold stockpiles. The tax system is already in place and gold is already the target of punishing tax treatment. But this discussion provides a good opportunity to reiterate that your core position in both gold and silver should consist of real metals in your possession.

Question: How do I know my gold coins are real? What about counterfeits?

ANSWER: It’s not really a problem with the bullion coins recommended here. Anybody who handles gold coins would instantly recognize a counterfeit gold coin by its weight, feel, and even its sound. Few things weigh or feel like gold. Lead and silver are so much lighter that counterfeits of either would be instantly noticeable. Platinum is actually a little heavier than gold, but since it costs more, there is no advantage to counterfeiting "gold" coins with platinum. Tungsten is closer in weight but difficult to mint. To satisfy yourself, deal with reputable and experienced people and ask to see and hold several types of gold bullion coins. Although privacy is the cardinal rule of gold investing, you may want to bring along a family member or trusted friend who has experience in precious metals investing.

Interestingly, almost all the counterfeiting of gold coins is confined to numismatic coins. Counterfeiters will use real gold or sometimes a lesser-carat gold to counterfeit coins that sell for premiums well above the gold price. If you are not buying numismatic coins, this will not be a problem for you.