Investing in Gold: Why and How?

Since it is a long-term investment (at least 10 years), investing in gold is often viewed as a means of diversifying one’s portfolio. It takes various forms, which fall into two broad categories: physical gold (bullion and coins) and paper gold (financial products indexed to the price of gold).

• Investing in gold does not generate a regular income, unlike a savings account or a stock. The return is realized upon resale and takes the form of a potential capital gain.
• However, physical gold has universal intrinsic and market value, which offers a certain degree of stability and security.
• There are many precautions to take before buying gold to avoid scams and disappointment. In particular, professionals must be registered with the Autorité des Marchés Financiers. There are blacklists you can consult to verify that the intermediary is in compliance.

The Different Types of Investment Gold Available

There are several ways to invest in gold, each with different characteristics and levels of risk.

Physical Gold

You can purchase physical gold—that is, coins or bars—from an authorized dealer and store it in a secure location before reselling it to potentially realize a capital gain.

The Lafinancepourtous.com website provides information on the characteristics of gold bars and coins, allowing investors to evaluate the products.

• Gold bars, discs, and ingots must weigh more than 1 g and have a purity of at least 995 parts per thousand. These items must also be accompanied by a certificate (test report).
• Gold coins must be in excellent condition (no scratches or dents) and: 
  
  • have been minted after 1800 or have been legal tender in their country of origin and be sold at a price not exceeding 80 percent of the market value of the gold;
  • have a purity of at least 900 parts per thousand.

Every year, the member countries of the European Union publish an official list of coins that are considered investment-grade gold for the following year. France, for example, has about twenty such coins, including the famous Napoleon.

Paper gold

You can also invest in paper gold by purchasing financial products linked to the price of gold through a financial intermediary. The price of gold will then cause your investment to rise or fall in value.

There are many gold-based derivatives available: 

• contracts for difference (CFDs) or futures (two financial products that allow investors to speculate on upward or downward movements in the price of an underlying asset—such as an index, currency pair, or stock—without actually owning it); 
• options: financial instruments that grant the right to buy or sell a certain amount of underlying assets…

These derivatives operate in a very specific way. It is recommended that you fully understand their characteristics, how they work, and the risks involved before making an investment.

Mining Stocks and Gold ETFs

Finally, you can invest indirectly in gold by purchasing shares in a gold mine or in specialized mutual funds known as gold ETFs (Exchange-Traded Funds). A gold ETF is an index fund listed on a stock exchange that allows you to invest in gold without physically holding the precious metal.

Where can you buy and sell gold?

You can buy or sell investment gold: 

• at a specialized establishment (currency exchange and numismatic shop);
• through an intermediary (broker);
• through your bank, if it offers this type of service.

Specific Regulations

The purchase and sale of gold are subject to specific regulations.

• You cannot buy gold with cash.
• Even though your anonymity is guaranteed with respect to the tax authorities at the time of purchase or sale, you are required to present a valid form of identification to the broker or specialized institution.
• Pursuant to the Consumer Protection Act of March 17, 2014, every transaction must be documented in a written contract. The business is required to record the transaction in a “transaction log.”

Precautions to Take Before Buying Gold

1. Verify the professional's compliance

The professionals you consult regarding an investment in gold must hold the necessary licenses to conduct their business. In particular, they must be registered with the Autorité des Marchés Financiers (AMF).

Checking a seller's reputation is also a good indicator.

2. Know the official price and product specifications

Before buying gold as an investment, you should compare the dealer’s prices with the official market price and with other available offers. This will help you gauge where you stand.

• Check the certificates for the gold bars, coins, and ingots.
• Consider the various costs (transaction fees, physical storage if needed, resale, taxes, etc.) to assess the profitability of your investment.
• See also the resale terms and conditions.

3. Remember to diversify your savings

It is strongly recommended that you not limit yourself to a single type of investment in order to spread your risk. First, build up an emergency fund that will allow you to respond to unexpected setbacks and that you can draw on as needed.

Buying physical gold is a long-term investment (at least 10 years), which means you should not sell your holdings in the near future. Furthermore, like any financial investment, this type of investment offers no guarantee of capital appreciation. 

What are the costs associated with buying and selling gold?

Buying or selling gold involves certain fixed costs that you should be aware of and plan for in advance.

Buying Gold

The purchase of physical gold is not subject to VAT, but it includes transaction fees paid to the intermediary. This commission ranges from 2 to 4 percent of the total amount.

Holding gold is not subject to taxation (you do not pay taxes on these assets). However, it may incur storage fees if you store it with a third party. 

Gold Sales

All sales of gold coins and bars must be reported. They are subject to a flat-rate tax, unless you opt for the capital gains tax regime for personal property. 

• Since 2018, the flat-rate tax on precious metals has been 11.5 percent. It is collected by the institution handling the sale.
• The capital gains tax rules for personal property apply to capital gains realized upon resale. These gains are taxed at a rate of 36.2%. A 5% deduction per year of ownership is applied starting in the second year, and the capital gain is fully exempt after 22 years of ownership.

Why invest in gold rather than other assets?

Gold is often portrayed as a safe-haven asset because it is considered a safer option during financial market crises.

No risk of bankruptcy

Unlike other investment products, physical gold does not generate income (which often depends on the level of risk taken by the investor). It is not subject to the risk of an issuer’s bankruptcy because it retains its value over time.

A highly liquid asset

Gold can be bought and sold quickly, unlike other investment vehicles (such as shares in a real estate investment trust (SCPI), for example), which require more time.

To diversify one's assets

Gold is a tool for diversification. It should not be your only investment. It allows you to invest your savings in a different type of financial investment and diversify your assets.

The Pros and Cons of Investing in Gold 

The Benefits

The advantages of investment gold have been discussed previously. These include, in particular: 

• its intrinsic value (based on its weight) and its universal market value (the ability to sell it in any country);
• its liquidity.

The Disadvantages

Investing in gold means holding a physical or non-physical asset whose value depends on the price of gold—even more so if you choose derivatives (CFDs, futures, gold ETFs, etc.). 

Furthermore, this is a long-term investment. As such, it must align with long-term financial goals (more than 10 years). The various fees (transaction, storage, taxes, etc.) are also factors to consider before investing.

Finally, keep in mind that this market tends to generate many misleading offers designed to defraud individuals.

_Sources

• _{https://www.abe-infoservice.fr/fr/epargne/autres-placements-risque/biens-divers-or-diamants-vin}
• _{https://www.abe-infoservice.fr/fr/epargne/autres-placements-risque/quelles-precautions-prendre-pour-investir-dans-lor}
• _{https://www.lafinancepourtous.com/pratique/placements/placements-atypiques/les-placements-atypiques/}
• _{https://www.lafinancepourtous.com/pratique/placements/placements-atypiques/acheter-de-l-or/}