Suppose Alan Greenspan is right and there is inflation in our future. If the Fed can't contain it, history suggests gold will be the best place to be.
What's the best way to invest in gold?
You could buy gold bars or coins directly from a brokerage house or a dealer. But that doesn't mean you'll make money if gold rises only a few dollars. That's because of the spread between retail and spot prices. You usually pay a broker $20 above spot for an American Eagle coin or an ounce of bullion. And some states charge a sales tax. If you sell the bullion for a profit after a year, you pay only a 20 percent capital gains tax.
But the tax treatment isn't as gentle with coins. Coins are considered collectibles and incur the higher maximum rate on long-term gains: 28 percent.
The better approach, says Forbes, is to buy gold statements from a stockbroker.
"The 2 percent one-way commission amounts to $6 per ounce, less than the markup for coins and bullion. And you eliminate the risk of buying lead bars that have been painted gold, or getting robbed taking your precious metal to storage."
Another way to invest in gold is through futures contracts, still further removed from the actual metal. Gold futures are traded in 100-troy-ounce contracts on the New York Mercantile Exchange. You can buy futures from any commodities broker; a typical commission is 0.4 percent. Go out about a year, advises Forbes, so you don't have to roll the contract over four times annually.
"You're also looking at a bid-ask spread of maybe 0.3 percent on a small retail trade. One more cost is forgone interest. The commodity broker will typically insist that for each contract, the investor put up $2,700 in a margin account in the form of cash on which no interest is earned, or in Treasury bills."
Another way to participate in a possible rebound in the yellow metal is to buy a call option. On the New York Mercantile Exchange you can buy a three-month call on gold for about $17 above the current price at $7 per ounce. If gold doesn't rise $17 in three months, your entire option premium is lost.
One final method: Buy gold stocks. The typical commission is $30 online for a $30,000 trade. Forbes favors such low-cost producers as Barrick Gold, Echo Bay Mines, Homestake Mining, Newmont Mining, Placer Dome.
Should you have doubts about picking your own gold stocks, you can always get a gold sector mutual fund, concludes Forbes.
Investor's Notebook is a digest of investment opinion from the world's leading financial advisers. It does not recommend any specific investments, and no endorsement is implied or should be inferred. For more information, contact the individual firms cited.