A Primer on Investing in Gold: The Benefits and Concerns

With inflation looking like it may be returning with a vengeance, many investors are wondering what that could mean for their retirement accounts.  Historically precious metals, specifically gold, have been a traditional holding to play defense against inflation – which makes sense, since (in theory) the value of the precious metal is in absolute terms.

Gold as an investment: a history

Of all the precious metals, gold is by far the most common as an investment. Historically, it has been used as money when exchanging for goods or services. After World War II, the United States Dollar was pegged to gold at the rate of $35USD to a troy ounce.

In 1971, in an effort to combat rising inflation, the United States unilaterally abandoned the gold standard, rendering the Bretton Woods System meaningless, creating a “fiat currency” (money not pegged to any store of value, but rather backed by a national government).

With the US Dollar now serving as the global reserve currency, gold was no longer considered a fixed store of value, and its price per ounce fluctuated against the US Dollar (and other global currencies). This “floating” value of gold can make it tricky to understand its intrinsic value in your investment portfolio. This is where we find ourselves today.

Once gold was no longer pegged to the dollar, it became reasonable to look at it as an investment, specifically as a way to counter the devastating effects of inflation. It may be a prudent move for the right investor. 

Let’s explore the pros and cons of gold as an investment and help you inform yourself if investing in gold is the right move for you…

Arguments for investing in Gold – the Pros

The biggest argument for investing in gold is diversification away from dollar (or fiat currency)-based assets.  One of the biggest threats to long-term wealth accumulation is inflation.  Investing in gold, either through the physical metal or gold-based paper assets, is probably something to ponder if you are either worried about inflation eroding the value of your nestegg or you have a sizable portfolio and would like to add in some non-correlated assets to serve as a hedge against a collapse in the value of your local currency.

Because gold is recognized around the world as having value (and is a limited resource), it stands to reason that it performs well in times of inflation and deflation.  

Graph of historical inflation in the USA. (Source: https://www.macrotrends.net/2497/historical-inflation-rate-by-year)

While gold has not historically kept up with the returns in stocks, it should be viewed as a stabilizer for tumultuous times.  You can think of it as an insurance policy for your portfolio.

How much of my portfolio should be dedicated to gold/precious metals?

Common financial advice indicates 5%-10% is the sweet spot for most portfolios that decide to invest in gold – although, as with everything personal finance, it is an entirely personal choice.

I’m convinced that I should have some of my portfolio invested in gold…how do I do it?

If you are interested in dedicating a portion of your investments to the precious metal, it would be wise to Learn About Gold.  A good place to start is to ask yourself: are you going to invest in gold through your taxable brokerage account, your IRA, or through physical coins/bars/jewelry?  

The cons to Investing in Gold

Goldbugs are all over the place, touting it as the only safe investment during times of economic uncertainty.  But, as mentioned above, dollar-based stocks have historically trounced gold over long periods of time.  

(Total Stock Return in Blue and Gold in Yellow.  Note the relative strength of gold during economic recessions, indicated by grey blocks.  Source: https://www.macrotrends.net/2608/gold-price-vs-stock-market-100-year-chart)

Warren Buffett has famously weighed in (pun intended) on the utility of gold as an investment:

• “Gold … has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end” — Buffett, letter to shareholders, 2011
• “I have no views as to where (gold) will be (in the next five years), but the one thing I can tell you is it won’t do anything between now and then except look at you” — Buffett, CNBC’s Squawk Box, 2009
• “(W)ith an asset like gold, for example, you know, basically gold is a way of going long on fear, and it’s been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn’t produce anything” — Buffett, CNBC’s Squawk Box, 2011

That’s not to say that we should take our investment advice from Buffett, but it is something to think about.

How to invest in gold through your IRA

If you’ve done your due diligence and decided that gold is the right investment for you, and you want to invest in it for a long period of time in a tax sheltered IRA, let’s talk about how to put that into motion.  You have two paths to choose from:

1. You can invest in gold funds. These investments are created by third parties and generally invest in gold-related assets: physical gold, gold futures contracts, and gold mining companies. This can be done through a traditional IRA or Roth IRA at any financial institution.

Gold funds are pooled investment vehicles which often take the form of mutual funds or exchange-traded funds (ETFs). In the case of mutual funds, the gold fund may be accessible through a financial institution such as a commercial bank, whereas ETFs can be bought directly on the stock exchange. In either case, gold funds offer investors a convenient way to gain exposure to gold without incurring the relatively high storage and insurance costs associated with directly owning physical gold bullion.

2. You can open a self-directed IRA, which opens the window into investing in alternative asset classes. Be aware that these IRA types can invest into products that can carry significant risk. Through the self-directed IRA (available as either a pre-tax traditional or after tax – and tax free Roth), you can buy gold bullion directly and have it held at your custodian. Custodians of self-directed IRAs are typically banks, trust companies, credit unions, brokerage firms, or savings and loan associations that have been approved by federal and/or state agencies to provide asset custody services to individual investors and financial advisors. They do not select metals dealers for their IRA clients. This is the investor’s responsibility. However, established custodians have relationships with several hundred dealers throughout the country and may be willing to share that list.

Conclusions and Action Steps

With the possibility of inflation returning to the United States, you might be wondering if it is worth taking the leap into gold as an investment. While there is no steadfast rule to determine its utility in your portfolio, here are some things to ponder.

So, is investing in gold right for you?

• Not for everyone – Your current IRA plan might not have the option to invest in gold or silver using it. Check with your bank and make sure that they have this capability before going forward. If they don’t, you need not worry. Just do a rollover of your funds into an IRA that supports this type of investment plan!
• Multifunctional – All types of IRAs support gold and silver investment. Whether it is a traditional IRA, a Roth IRA, SEP, or any other employee retirement plan, they are all compatible with the precious metals IRA option.
• Choose a good custodian – When picking someone to open an IRA with, make sure that they have enough experience in this field. You will need some type of advice when making investments in the future, and it would be nice if this was reliable.
• Know the law – You have to keep the gold or silver metal that you get in a safe place. However, the law requires you to keep this in storage facilities or units that have been approved by the Federal Reserve or another entity. In addition to this, the storage location should be somewhere away from your IRA custodian’s location.
• You can do a rollover of a certain percentage of the funds in your IRA or old 401K account so that you can maintain both and still invest in the precious metals you want to buy. If not, you can just fund it independently. There is a ton of options out there, so get some professional advice before you do anything you aren’t sure of.
• Decisions, decisions – You can choose among a large range of precious metal products for the IRA. You could invest in gold or silver jewelry, bullion or even mining stocks. Check with your custodian about the perks and drawbacks of each type of investment before doing anything.
• Check the prices – The price of gold and silver is determined by the current trading value of the stocks. Gold is generally not as susceptible to changes in the economy as cash, which is why so many people invest in precious metal IRAs as opposed to the traditional kind. Again, a good idea would be to seek the advice of experienced, trusted companies and professionals.

Only you can decide if investing in gold is right for you.

Disclaimer: All views expressed in this piece are for educational purposes only.  Do not take anything written as advice.  If you decide to act on the material written, consult with an investment professional.