Gold's Tax Twist

State Street says it has done what it can to make sure that investors understand the tax consequences, such as including a section in the prospectus. The firm does, however, note some inconsistency in the tax code.

"Gold Shares was not deemed a collectible for IRA inclusion," says Dodd Kittsley, director of ETF research at State Street Global Advisors. "It almost seems like there is a double standard," but he notes that the product opened the bullion market to investors that did not have access previously, or that didn't have the temperament for the highly risky gold futures market.

Other experts stress that buying a bullion ETF isn't the only way to gain gold exposure.

"I think the difference in taxes is just too much to ignore," says Joel Ticknor, principal at Reston, Va.-based Ticknor Atherton & Associates, a specialist fee-only investment adviser. "I just don't use it in taxable accounts," but he would consider it for non-taxable retirement accounts such as IRAs or 401(k)s.

Instead, he suggests clients wanting exposure to gold buy shares of large established gold mining companies such as Newmont Mining(NEM Quote), Barrick Gold(ABX Quote), Gold Fields(GFI Quote), Rio Tinto(RTP Quote), and AngloGold Ashanti(AU Quote).

He says he prefers buying the stocks directly rather than the Market Vectors Gold Miner(GDX Quote) ETF, which includes some smaller, "more speculative" companies in addition to the big names, and recommends a portfolio weighting for gold related investments of 5% to 10%.

The question is now, will price volatility scare away investors before an unfriendly tax bill does?

"Evidence has shown that, historically, mutual fund investors have chased performance," says Brian Boswell, a research analyst at Boston-based Financial Research Corp., which tracks mutual fund and ETF fund flows. "However, I would hesitate to conclude the same for ETF investors."

Holders of the other gold bullion ETF, iShares Comex Gold Trust(IAU Quote), would be taxed the same way, although fewer people will be affected. The Comex Gold had only $857 million assets under management through the end of July, according to Barclays Global Investors, the ETF's operator.