Getting in on the gold rush

With gold topping $1000 an ounce, here's how to follow the yellow brick road without hitting any potholes.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- With gold prices recently crossing the $1,000 an ounce threshold, investors looking for ways to join in the gold rush will have to navigate volatile waters.

The yellow metal is extremely sensitive to a number of economic factors, making it risky for those looking to make a quick buck on the back of daily record prices. And given that gold is now trading in such rarefied air, many investment experts recommend waiting for gold prices to retreat before buying actual gold bullion.

Hiding a stash of gold coins may seem like a good idea at the time but the reality is that buying and selling physical gold is probably the least desirable method for novice gold bugs. For starters, transporting and storing the metal can be expensive, depending on how much you buy. You'll also want to buy insurance for your precious metal. And there are usually transaction fees involved. In some cases, these costs can erase your returns.

Then, there are the taxes. Gold coins and bars are considered collectibles by the Internal Revenue Service, which means profits are taxed as income and not capital gains. Net capital gains from selling gold is taxed at 28%, compared with 15% for gains on other long-term investments.

But don't be discouraged. There are still ways to take advantage of the lustrous gold market without completely breaking your bank.

ETFs and mining stocks have more shine

Gold-backed exchange-traded funds (ETFs) help investors avoid many of the pitfalls associated with buying and selling the metal. Street Tracks Gold Shares (GLD), one of the largest ETFs with trusts currently worth more than $20 billion in gold, issues shares that allow investors to have fractional ownership of the fund's gold without having to take possession of it.

For investors with a professional level of experience trading stocks, ETFs provide a familiar and convenient way to gain access to the gold market. Shares of Street Tracks, for example, trade on the New York Stock Exchange. ETFs provide the "beauty of liquidity," says John Nadler, senior analyst at Kitco Bullion Dealers in Montreal.

However, many analysts also say that the recent surge in gold prices has been fueled largely by speculative investments by hedge funds. "The average person needs to realize that the boat that is half full with speculative funds whose motivations are different," Nadler says.

Another downside is that ETF shares are also considered collectibles by the IRS and are taxed at the same rate as coins and bars. This means that capital gains on ETF shares are taxed at nearly twice the rate of other "soft" equity investments, such as stocks.

So the least risky way to try and get on the gold bandwagon is to put some money into mining companies.

Shares of some of the largest gold miners have been riding gold's momentum and in some cases have outperformed the metal itself. Like ETFs, mining shares allow investors to reap the benefits of soaring gold prices without having to buy the metal itself, thereby avoiding all those costly fees.

The AMEX Gold Bugs Index (HUI), a basket of 15 major gold mining companies, is up nearly 50% over the past 52 weeks. Meanwhile, the price of gold is up about 40% year-over-year.

One of the index's top performers, Randgold Resources Ltd. (GOLD), saw its stock jump 138% since March of last year. Agnico-Eagle Mines (AEM) surged nearly 110% and Barrick Gold Corp. (ABX) is up 91% year-over-year.

Still, investors need to keep in mind that there is no guarantee gold prices will stay on an upward trajectory much longer. Jumping in to mining stocks now is risky, to say the least. And many financial planners think you should only put a small portion of your portfolio in gold or gold-related investments because of the risks.

So don't go overboard if you plan to go chasing the proverbial pot of gold at the end of the rainbow. To top of page

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