In these unprecedented times, individuals are feeling an incredible amount of pressure when it comes to retirement. Many people are seeing numbers in their retirement accounts that make them panic. Others are receiving early retirement offers from their employers as businesses attempt to cut costs.
People are increasingly considering different approaches to saving for retirement, including purchasing gold. When stocks are underperforming, investing in something like gold may seem like a smart move. However, this decision deserves careful consideration.
A Brief Overview of Investing in Precious Metals
Gold prices can fluctuate a great deal from year to year. In August of 1999, an ounce of gold cost $255. The highest price for gold was recorded at $1,839 per ounce in September 2011. As of June 2020, the price was about $1,700 per ounce. While the price of gold has increased significantly in the past couple of decades, there have also been some periods of decreasing value.
Because the precious metals market is often not linked to other markets, such as bonds and equities, including gold in a portfolio can be a good way to achieve diversification if it is included among retirement investments. One way to invest is through an individual retirement account (IRA) that focuses on precious metals.
Despite the name gold IRA, accounts that focus on precious metals often allow investors to own palladium, silver, and platinum in addition to gold. Including gold and other precious metals in an IRA has only been possible since 1997, but the practice has gained some momentum over time.
Gold prices generally move in the opposite direction of paper assets. As a result, they can help stabilize portfolios that rely heavily on bonds or stocks. Also, precious metals are especially good for hedging against inflation. These reasons have helped gold IRAs grow in popularity, especially since the financial crisis of 2008.
The Recent Growth in Popularity for Gold IRAs
When gold IRAs were first implemented, the demand for them was quite limited because they involved complicated transactions. Only persistent investors were usually up for dealing with the additional steps. Investing in a gold IRA involves finding a trustee or custodian for the IRA and an approved depository.
Once the precious metal is purchased, it must be transferred to that depository in a manner that allows the custodian to account for it. However, the financial crisis of 2008 resulted in a significant amount of distrust in financial institutions. As a result, people began turning to alternative forms of investment, including precious metals, in greater numbers.
As the popularity of precious metals as investments increased, more companies emerged to facilitate the transactions. Today, investing in a gold IRA involves only a single step, so it is much more feasible for the everyday investor. Furthermore, gold IRAs now come in both Roth and traditional configurations, so they are quite versatile depending on the needs of the investor.
Notably, gold IRAs invest in physical metal, whether coins or bullion, and are distinct from mutual funds or exchange-traded funds that track a gold index. To invest in a gold IRA, the metal must meet fineness standards set by the IRS and be held by the IRA trustee rather than the owner of the account in a depository approved by the IRS. However, gold IRAs handle these details for the most part.
Issues and Risks Involved with Gold-Based Investments
The main issue with investing in gold is currently the added expenses. Typically, individuals will pay a markup when they buy gold, which accounts for the seller’s fee. However, this is a one-time expense. The annual costs include the custodian fee, which is associated with all IRAs, and a storage fee charged by whatever facility holds the metal.
When they sell, individuals also have to pay cash-out costs, which means that whoever buys the gold will likely pay slightly under market value for it. Some IRA companies do guarantee to buy gold back at current wholesale prices. However, individuals could still lose some money by closing the account, which is not the case with other IRAs.
Another issue that people can encounter involves required minimum distributions. While this issue does not apply to Roth gold IRAs, traditional accounts will require distributions starting at age 72. However, metals are not very liquid, so people will generally need other investments from which they can pull money or they could find themselves in a difficult situation.
Just as with any investment, the price of gold goes up and down so people could find themselves forced to sell when the price is particularly low. Fortunately, as mentioned above, if the price of gold drops, that usually means paper-based investments are performing particularly well, so the portfolio remains balanced.
Of course, investing in gold does come with some particular risks. For example, theft is an issue with any physical commodity. Theoretically, someone can break into a depository and steal gold. Depositories are insured, so the investment should be protected, but it would certainly cause some chaos.
Investors also need to vet custodians thoroughly. Some custodians have committed fraud by stealing from customer accounts or by selling metals that they do not actually have in their possession.