How (and Why) I Added Gold to my IRA.
Posted: July 20th, 2011 | Author: Joe | Filed under: Investing | Tags: buy gold, Gold, Investing, IRA | 1 Comment »Why invest in gold?
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Gold is a well known hedge against inflation, uncertainty and a falling dollar. Since this pretty much sums up the environment we’ve been living in for the past decade, it’s easy to see why the value of gold has been on the rise. But that’s past performance and as we all know, past performance is no guarantee of future results. So is gold still a good investment?
I’m not going to pretend to know the answer to where gold is going in the future, but here are some things to consider. Quite frankly, they are no small part of why I was convinced to invest in gold in my IRA a few months back when the price dipped.
Budget busting entitlement programs.
Unfunded entitlement programs will force future income earners (you, your children and grandchildren) to keep less of their income after taxes, thereby shrinking available wealth.
U.S. funding for future promises lags by trillions:
“The government added $5.3 trillion in new financial obligations in 2010… that brings to a record $61.6 trillion the total of financial promises not paid for.”
The United States credit rating is in jeopardy.
“Fitch said it would first place ratings on “watch negative” if lawmakers failed to enact an increase in the debt ceiling by August 2, when the Treasury will have run out of extraordinary measures to avoid a default.”
This could lead to the U. S. paying a higher interest rate on its debt, which means more tax revenue goes toward the interest payments of past over-spending, leaving less for current spending. The result, of course, is higher taxes, lower incomes and less wealth.
Inflation. Hyperinflation. Deflation.
Inflation and deflation have a big impact on the value of your wealth. After all, if you have $1,000 in the bank, but each dollar goes down in value (inflation) to .70 cents, then your $1,000 is now the same as $700 before inflation. Gold on the other hand, holds its value and can even rise in value during inflationary times which makes it the perfect place to store your wealth.
Some people think The Time to Prepare for Hyper-Inflation is BEFORE It EXPLODES , while others only see Hyperinflation Nonsense in Multiple Places
I happen to believe that an ounce of prevention can spare much pain and with gold trading in the $1,500 to $1,600 an ounce range it may seem like a costly ounce of prevention, but I’d still ratherbe prepared for stagflation or inflation or even deflation.
The trick isn’t so much in figuring out whether we’re going to experience inflation, hyperinflation, deflation or stagflation because any one of these situations will keep the demand for gold high, and keep the price high.
In the end, the one major risk to the price of gold is a sound fiscal policy in Washington D. C., a balanced budget and a robust economy.
I believe these factors are years away, and so is any big drop in the price of gold.
How to hold gold in an IRA or 401(k).
You basically have two choices when it comes to investing in gold in your IRA or 401(k):
1) Physical gold
2) Gold stock
I suppose you could add mining stocks and other precious metal related stocks, but that’s moving away from gold a bit too much, and I’m sure there are those who would say that even a gold index ETF is too far removed from gold. That’s a debate for another time..
Buying physical gold.
It’s possible to hold gold in IRAs (traditional and Roth), simplified employee pension (SEP) and simplified incentive match plans for employees (SIMPLE). Most IRA plans do not allow for this option though, so the first thing you’ll want to do is check with the custodian of your IRA and see if they allow holding physical gold in your account.
If your current IRA does not offer the option to buy gold coins and bullion, you’ll need to open a gold and silver IRA.
Why I chose paper.
My IRA does not offer gold coins and bullion, and I have chosen not to open a new gold and silver IRA. Instead, I invested in the PowerShares DB Precious Metals (DBP). Here’s why….
Fees
Gold and silver IRA’s have more fees than traditional IRA’s because of added regulatory overhead. The IRS stipulates that the gold must be stored at an approved depository. This depository is a separate entity from the IRA custodian, and the require a fee for storage.
The IRS also requires that Gold coins be 99.5% pure gold, and must be approved by the IRS and be legal tender to qualify.
This is all good, because you want some assurance you’re not dealing with some fly-by-night con-artist who’s going to sell you some gold plated junk.
But this does limit the field of qualified vendors. Here are some of the most popular qualified gold coin providers:
- American Gold Eagle
- Perth Mint Lunar series (from Australia)
- Kangaroo-Nuggets (from Australia)
- Canadian Gold Maple Leaf
- Austrian Philharmonics coins
The way this breaks down is that you end up paying for two services:
- The custodial service
- The depository service
The custodian (IRA administrator) usually charges a fixed annual fee or a percentage of the IRA’s value. The depository will also charge its own fee. Transaction fees may be applied to each contribution you make to your IRA.
Simplicity
I’m a big fan of keeping things as simple as possible, and to be honest I don’t really need another retirement account to keep track of.
I’m very happy with my Fidelity account. I can invest in Mutual funds with no transaction costs, and no load. I can invest in ETF’s like DBP for $7 a trade. It’s all good. I don’t need the hassle of another, specialized IRA for gold.
Liquidity and yield
Physical gold is great for holding value, and in times of uncertainty, appreciating in value. But gold pays no dividends. When times are stable or prosperous and relatively peaceful (think mid to late 1990′s) gold doesn’t do much. In fact, you’re lucky if you don’t lose value in that kind of environment.
Buying gold in a tax deferred account doesn’t get you the same tax advantage that holding interest generating assets does.
The big reason I chose paper is that it’s far more liquid than physical gold.
Gold bugs will tell you that the real deal is far better than paper, because if the excrement really hits the fan, your paper is worthless while physical gold still holds value.
I am of the opinion that in those kinds of scenarios, where the entire monetary system of the western world collapses, bullets will be the new currency, not a shiny metal with no real industrial use. 
Why I chose PowerShares DB Precious Metals
I wanted an ETF or mutual fund because it would be easier (and quicker) to sell than physical gold if the price of gold starts to drop. I can also hold those shares in my existing IRA, which means less fees, and more flexibility.
In the end, I chose the PowerShares DB Precious metals ETF over the SPDR Gold Shares (GLD) ETF because I wanted more diversification. I was watching the price of silver rocket ever higher at a rate greater than gold, and wasn’t prepared to make a call on one or the other. I also wanted to get some exposure to other metals which are precious but have industrial uses, like platinum. So, DBP was a basket of indexes that track multiple precious metals, which should give a smoother ride than focuses purely on gold (or silver).
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