Gold is the most coveted precious metal in the world and has served as a means of exchange and ornamental functions across civilizations. In the modern era, gold is still regarded as an immensely valuable material, making it a powerful means of safeguarding personal wealth from the vagaries of the extremely volatile monetary system run by most governments of the world.
While there are many other investment options such as stocks, bonds, real estate, private equities and others, people still find comfort and peace of mind in having some of their wealth in gold. In fact, many portfolio managers and financial advisers recommend that investors should set aside about 5-20 per cent of their investment portfolio in gold. This goes to show the importance of gold as an investment.
With the Enactment of the Taxpayer Relief Act in 1997, it became legal for Americans to invest a part of their IRA portfolio in precious metals including gold, silver, platinum, and palladium. Before the passage of the law, Americans were forbidden to invest in precious metals as part of their IRA investment in addition to other stringent restrictions imposed on the traditional and Roth IRAs. However, you can now invest in gold and other designated precious metals through a self-operated gold IRA.
Why Should You Dedicate 5%-20% Of Your IRA Portfolio To Gold Investment?
The main reason why precious metals are an attractive form of investment is to diversify the holdings in a retirement account. Most people are not comfortable placing all their retirement funds in monetary instruments such as stocks and bonds because they are highly susceptible to the fiscal policies of the government and a stock crash could wipe off all the retirement savings they have been toiling to save after all these years.
Hedge Against Inflation
Gold has a solid history of being an excellent hedge against inflation as its value appreciates as the purchasing power of fiat money diminishes. Inflation results from the excessive circulation of currency which brings down the value of money skyrockets the prices of goods and services and makes living costs unbearable for the citizens.
While many analysts argue that governments and regulatory agencies of the modern era won’t allow the recurrence of debilitating inflation such as the type witnessed during the Great Depression, cases such as Zimbabwe and recently Venezuela are fresh reminders that nothing is guaranteed. To avoid the sudden loss of their wealth, people keep a part of their wealth in the form of physical gold and other precious metals. In that form, they are immune to any unexpected behaviour which fiat currencies and their regulators can cause.
Gold is a fear commodity in the sense that people tend to buy more gold during times of economic uncertainties, political instability, war, and other events that could adversely affect the stocks market. Due to this behaviour, the price of gold tends to rise during periods of fear and uncertainty.
Gold As An Insurance Policy
During times of economic upheavals or political turmoil, gold is a sure way of weathering the storm as it doesn’t lose value in times of crises, rather, it appreciates in value. Many people have argued that gold is not a wise form of investment, but they miss the point. While it is true that physical gold kept in a secret safe won’t increase, but it ultimately provides a sure guarantee no banker or insurance executive can offer during times of chaos.
Investing In Gold
Investing in a gold IRA is not a difficult process if handled by an expert company. The first and most important step is to have an IRA that supports precious metals investments. This requires opening a new Precious Metals IRA or gold IRA. The gold IRA is self-directed, i.e., the owner of the account is responsible for making every investment decision about the account.
Note that a gold IRA requires a custodian like every other type of IRA, but custodians of gold IRAs are usually specialists in that area as self-directed IRAs have a larger scope of investments which makes their administration more complex.
The IRS has strict laws guiding investments going into a gold IRA; therefore, you must be extremely careful not to flout IRS rules when investing with the funds in your gold IRA.
Some Other Types Of Investments A Gold IRA Owner Can Add To Portfolio:
- Private Stocks
- Private bonds from corporate bodies and governments.
- Mutual Funds Shares
- Certificates of Deposit (CDs)
- Exchange Traded Fund (ETF) shares
- Real Estate
- Money Market Fund shares
In addition to these, owners of a gold IRA can invest in physical gold, silver, platinum, and palladium. The IRS regulations regarding precious metals investments in gold IRA highlights the types of precious metals bullion that can go into the gold IRA.
Precious metals termed as collectables are not allowed except one. The others are bullion coins. Also, the IRS stipulates that only precious metals of the highest purity can go into the gold IRA account as investments. For this reason, only gold products of 24 karats are allowed in the gold IRA, except for the 22 karats American Eagle coins. Gold products from the US Mint and some select countries as well as certain private gold refiners can be included in a gold IRA.
The Following Gold Products Are Allowed As Investments In The Gold IRA:
- Austrian Philharmonics
- Canadian Gold Maple Leaf Coins
- British Gold Britannia Coins
- South African Gold Krugerrand Coins
- American Gold Buffalo Coins
- Chinese Gold Panda Coins
- Gold Bullion bars of minimum purity produced by specific private mints.
You can also add different silver, platinum, and palladium products to your gold IRA portfolio, so far as they meet every criterion set by the IRS.
In addition to these, you can also invest in paper gold, i.e., the stocks of companies that are associated with gold. This can be in the form of the stocks of gold mining companies, gold-backed mutual funds, mining ETFs as well as gold-backed ETFs.
However, caution and due diligence should be done when investing in paper gold as it is subject to different factors beyond the control of even stakeholders in the industry.
• One of the problems with gold stocks is that they are highly volatile compared to the relative stability offered by physical gold. History shows that gold stocks tend to depreciate when the price of the precious metal falls.
• Additionally, companies that explore and mine gold are exposed to high taxes and regulatory oversight which may negatively affect their stock performance.
• The high cost of production may prevent the companies from paying dividends and mismanagement may jeopardize the future of the company and your stocks.
• Political instability in the gold-mining regions can crash the value of gold stocks.
When you have decided on what to buy with your funds, all you have to do is inform your custodian about your plans, and the custodian will take it from there. However, the IRS doesn’t allow you to take possession of any precious metal investments in your gold IRA. The precious metal must be kept in an IRS-designated depository.
Also, remember that despite numerous options a gold IRA can accommodate, not every custodian will provide holding services for all the options. This means that you are restricted to invest in only the options your custodian agrees to hold in your gold IRA account.
Due diligence and research are paramount to prevent flouting IRS rules. If you encounter any difficult area while trying to invest in your gold IRA, contact your IRA custodian for answers or hire an experienced financial adviser and tax lawyer for expert advice.
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