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Gold Investments Remain a Stable Choice Despite Economic Uncertainty

The Gold Standard

Skittish Baby Boomers and their financial advisors seeking retirement investments that might act as a shock absorber to their portfolios during volatile times are increasingly turning to the age-old fallback plan: Gold investments.

This enduring asset class once again appears to be a standby option for those made nervous because of heightened economic and social uncertainty. Why? “Some people are drawn to gold,” says CNN Money’s Walter Updegrave. “Because unlike stocks, they see gold as solid and tangible, an investment they feel they can count on to hold its value.”

Holding Gold Over Time Pays Off

Managing Director Charles Petrie of the alternative investments firm Dolan Capital Group is seeing growing interest in this nontraditional asset class. “Many advisors I speak with think there are good reasons to consider gold and other precious metals during periods of conflict – like the present,” he says.

For anxious types, gold investments can play a critical role in a longer-term diversification strategy, such as planning for retirement, Petrie adds. He notes, “For those investors who enjoy owning an asset that they can theoretically see, touch and hold, precious metals can even provide some emotional support. Gold has always had value to people as jewelry, even before the first gold coins appeared 2,500 years ago.”

There are good reasons to consider gold and other precious metals during periods of conflict

Whether investors are looking for peace of mind or portfolio diversification, or simply want to take advantage of the rising price of gold, what should they know about investing in this asset for retirement? A closer look at self-directed IRAs, recent regulatory changes and precious metals storage can offer an answer.

Solid Gold is Liquid

Gold carries no credit risk, is liquid and is not subject to inflation, making the investment safer over time. Jeffrey Kelley, a senior vice president at Equity Institutional, has had a first-hand look at the challenges of alternative investments.

“Through a self-directed IRA, retirement savers can invest in alternative investments like gold, other precious metals, real estate, private equity and distressed debt notes, to name just a few,” says Kelley. “The purpose of an IRA, of course, is to provide an investor with a flexible, tax-advantaged account that can be used to save for retirement. But many traditional financial services firms only allow approved stocks, bond, mutual funds and CDs to be held in an IRA.”

Suggested reading, “Why Gold?

You Can Hold Gold and Other Precious Metals too, says IRS

The IRS allows IRAs to hold gold, silver and platinum coins, and gold, silver, platinum and palladium bullion that meet certain standards. The three primary precious metals most often found in self-directed IRAs are:

  • Platinum: One of the rarest metals on earth, platinum is used in emission control devices and dentistry.
  • Palladium: This is a byproduct of platinum and nickel and is mainly used to make catalytic converters and ceramic capacitors.
  • Silver: Popular for use in jewelry, and is also often found in industry and electronics due to its electrical conductivity.

“Death by Delay” Won’t Affect Golden Opportunities

Speaking of gold investments, financial advisors who provide such advice and receive compensation for retirement investments have acted in the best interest of their clients on a voluntary basis – until recently. However, the U.S. Department of Labor’s Best Interest Contract Exemption (BICE) now requires financial advisors only to collect compensation as long as they legally commit to putting client interests first. In addition, advisors must follow certain rules related to conflict of interest in giving recommendations to clients. How does this affect an investor’s path forward?

Suggested reading: Do Tangible Assets Out-Perform Stocks and Bonds?

While this long-debated final ruling has been delayed, causing some to worry about stalled investment opportunities. Kelley emphasizes that investors and financial professionals shouldn’t feel limited in their retirement selections as gold investments will continue on.

“Importantly, the DOL’s fiduciary rule does not limit any retirement investor’s selections, he says. “Gold investments and other alternative investments can still be included in retirement portfolios under the rule.”

Treat Your Precious Metals like Gold

Some investors think they can save money on storage by buying precious metals in their IRA through an LLC and then storing the metals at home or another place of the investor’s choosing, but that is a misconception.

“What investors don’t realize is that they could end up paying as much or more in costs to establish and maintain their LLC while also adding administrative complexity,” Kelley says. “In addition, it has not been determined that nontraditional methods of storage are acceptable to the IRS. Some investors even pursue Precious Metals IRA custodians who offer overseas storage options, without realizing that these facilities may operate with lower security standards than those in the U.S. These offshore arrangements may also delay the timely retrieval of assets, should they be needed quickly.”

Gold carries no credit risk, is liquid and is not subject to inflation, making the investment safer over time.

“In the coming months, there could be additional changes to the products and services that financial services firms offer retirement savers as the DOL continues to clarify the new fiduciary rule,” Kelley added. “Investors should be sure to contact their IRA provider if they have any questions about their ability to invest in a particular investment using IRA funds.”

Meanwhile, advisors and broker-dealers are growing more aware of the importance of employing the services of specialized custodians in the precious metals marketplace. According to Kelley, “Managing payments, documentation and reporting may be increasingly important. It takes qualified custodians in this area to understand and handle these complex transactions.”

Gold Shines in Dark Times

Tensions with North Korea pushed international gold prices above the psychological barrier of $1,300 to a new 11-month high of $1,335 in September 2017. (Traders consider $1,300 to be the key “psychological level” where they will choose to buy or sell gold.)

“There were signs that investors were seeking asset security as gold prices climbed,” the Washington Post reported. “When Kim Jong-Un detonated a hydrogen bomb, gold traders around the world must have rejoiced,” Narendra Nathan and Yogita Khatri of the Economic Times wrote.

Over a much longer period, from 1997 to 2016, gold’s hardiness as an investment shone through. It finished in third place on an annualized return basis, just behind real estate investment trusts (REITs) and large cap domestic stocks.

Over the past two decades, gold finished at #3 among the best-performing asset classes (Source: J.P. Morgan Asset Management, Barclays, FactSet, Standard & Poor’s, Dalbar Inc.)

Says CNN’s Walter Updegrave, “You could make a case for investing a portion of your retirement savings to gold,” he says. “Essentially, gold becomes another asset class in your portfolio, adding a bit more diversification.”

While stable, liquid and traditionally safe, gold investments are not guaranteed to glitter for every investor. “Where gold and self-directed IRAs are concerned the IRS has made clear that investors have full responsibility for undertaking their own due diligence regarding their investment decisions in this area,” cautions Jeffrey Kelley. “At the end of the day, it’s up to investors to educate themselves on the merits of their self-directed IRA investment.”

Editors’ Note:  While gold is is viewed by many as a way to hedge against inflation hedge (that is, a way to protect against the erosion of purchasing power), this is not a universally agreed upon proposition.  For an excellent explanation of the argument against, we recommend this piece by Forbes’ senior editor Daniel Fisher.  

About John Drachman

As an award-winning writer, John developed marketing communications initiatives for dozens of money managers for more than 20 years. John combines editorial skill and marketing knowledge in helping advisors, money managers and service providers to grow and retain assets.

View all articles by John »

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