The current "it" investment of the moment is gold. Everyone seems to be talking about the rally in what some have described as the last storehouse of value. Gold ETFs have become wildly popular. And now some of the best hedge fund managers are starting to build dedicated funds around the precious metal.
I'm not as bullish on the yellow metal, and I don't believe that it deserves a dedicated position in most individual investors' portfolios. Why? For starters, gold is treated as a collectible by the IRS. Instead of the 15% capital long-term gains tax rate enjoyed by stocks and bonds, any profit coming from a 12-month or longer holding period is subject to a 28% tax rate. If gold is held short-term, the gain is taxed as regular income.
Gold investors may have more tax exposure than they think. Most gold ETFs were created as grantor trusts. At the end of the year, any buying or selling activity in the ETF is passed pro-rata to each stockholder. The bottom line: even buy-and-hold investors will have a tax bill, and it's likely to be significant.
The sudden popularity of gold has me wondering if there's anyone left to take a position. Eventually, the first buyers will start paring down, and a lack of buyers would obviously result in a sell-off.
