More Americans are looking for a way to add luster to their
individual retirement accounts — gold. They are taking advantage of
little-known U.S. tax regulations to buy precious metals, coins and
bars for their IRAs.
Still, some investors consider precious metals worthwhile for a
small portion of their IRA portfolio, for many of the same reasons they
buy precious metals in general: They diversify the portfolio, they’re a
hedge against inflation, and an insurance policy against disasters like
this fall’s stock-market meltdown.
Similarly, financial planners interviewed for this article included
skeptics who oppose putting metals in IRAs, though not for reasons
having to do with IRAs themselves. These critics tend not to recommend
direct ownership of precious metals in general, citing limited
liquidity and the lack of interest or dividend payments. These critics
favor using other hedges in IRAs, such as Treasury Inflation Protected
Securities, or proxies for precious metals, such as mining stocks.
Gold’s history as an investment is spotty. After a record high of
$850 an ounce in 1980, gold was lower for nearly three decades before
finally hitting a new peak in January. During that time, the Dow Jones
Industrial Average soared from below 1,000 to above 10,000. But since
2001, gold has far outperformed equities, with the spot price roughly
quadrupling to a record of $1,032.50 in March before pulling back.
To buy precious metals in a retirement account, investors need a
self-directed IRA, which is a type of retirement account that can
invest in almost any kind of asset except life insurance and
collectibles. Companies that offer self-directed IRAs and
metal-investing services include Sterling Trust Co., GoldStar Trust Co. and The Entrust Group.
“It’s a fairly small segment of our business, roughly 10% in terms
of number of accounts and assets held,” says Kelli Click, vice
president for marketing and product development at Sterling Trust, in
Waco, Texas. “But it is a growing trend and definitely one we’ve
noticed in the last couple of years,” she says. As of early in the
fourth quarter, the firm administered some 62,000 IRAs with assets of
more than $4 billion. Ms. Click put the value of metals in those IRAs
at $380 million to $400 million. The number of IRAs at Sterling Trust
that hold metals, meanwhile, is up 150% so far in 2008, she says.
GoldStar Trust had 7,200 retirement accounts holding precious metals
totaling a little more than $400 million early in the fourth quarter,
says Trey Hightower, trust officer for GoldStar in Canyon, Texas.
Metals IRA transactions surged some 700% over the prior 16 months, he
adds.
The Entrust Group reports that of its 50,000 clients with
approximately $4 billion in self-directed IRAs early in the fourth
quarter, close to 1% of the accounts held metals, with value estimated
at $11 million. Some $10 million worth of those metals holdings came
since Jan. 1, and 4% of all new assets purchased by clients this year
were metals, the company says.
George Cooper, senior account executive with the bullion dealer USA
GOLD-Centennial Precious Metals in Denver, says that he fields 30 to 50
phone calls a day about coins or precious metals, and that half of the
inquiries are for IRA investments. “In the springtime, we had a lot of
interest in gold because of the price,” Mr. Cooper says.
GoldStar’s Mr. Hightower, meanwhile, says his company kept getting
calls this autumn even as gold prices retreated. The callers were
looking for a safe haven as the credit crisis intensified, he says. “We
do have folks coming in thinking, ‘I’m going to make money,’ ” Mr.
Hightower says. “But we have a lot who have expressed that they want to
preserve what they do have.”
Investors often buy gold not as an investment but as a “currency of
last resort,” says Hugh Bromma, chief executive of The Entrust Group in
Reno, Nev. “Gold has not historically outperformed the stock market,”
he says. “So the person using their IRA is looking for a safe haven for
cash.”
Nevertheless, he describes the investment as “only suited to people
who know how precious metals, such as gold, work.” They should be aware
of risks of commodities generally and the potential for volatility, he
says.
David Morgan, an independent precious-metals analyst and founder of
Silver-Investor.com, in Spokane, Wash., says many Americans “don’t have
a clue” that they can include metals in their IRAs. He advocates metals
because of their negative correlation to other assets, particularly
equities. Gold tends to perform best when “needed most,” when more
traditional asset classes decline, he says.
Mostly older investors are buying gold for their self-directed IRAs,
after opening new accounts or performing rollovers or transfers from
their previous IRA custodian. Investors should check out potential
custodians before making a move, says IRA consultant Ed Slott of Ed
Slott & Co., Rockville Centre, N.Y. Also take care to transfer the
IRA correctly — preferably from trustee to trustee — to avoid
creating a “taxable event,” Mr. Slott says.
Once the account is open, investors select a bullion dealer from
which to purchase metal. The dealer sends purchased metal to a
depository, which notifies the account custodian when the metal arrives.
Commissions and fees are one of the considerations when choosing a
custodian or a dealer, but industry officials also cite service, such
as how quickly a dealer can deliver metal. Annual fees charged by IRA
custodians range from $50 to $250 for administration; storage charges
are mostly around $90 to $100. There also are bullion-dealer
commissions.
How favorably a fee-based financial planner or adviser looks on gold
as part of an IRA hinges partly on whether they like gold as an
investment for any kind of portfolio.
“I wouldn’t tie up too much of the IRA in that, but it’s not bad for
a piece, just to hedge your bets,” says Mr. Slott, who adds that he
advises investors to maintain sufficient liquid assets in case of an
emergency. (Custodians of IRA accounts say it can take from a few days
to a couple of weeks to get a check. )
“I’m not a fan,” says Sheryl Garrett, founder of the Garrett
Planning Network, in Shawnee Mission, Kan. Ms. Garrett prefers TIPS to
protect against inflation. “You’d actually get a positive return,” she
says. “No matter what, there is some interest paid. And it’s secure —
as secure as anything can be.”
Ms. Garrett says other commodities, like oil or natural gas, are
better than gold as an inflation hedge. The price of gold, she says, is
too dependent on jewelry demand.
Mary Erl, founder of Nestegg Financial Advisors in Gurnee, Ill.,
says gold “generally does work” as an inflation hedge, but she also
favors TIPS. Gold offers a psychological advantage in that investors
can hold it in their hands, she says. But there are other ways to own
precious metals in IRAs, she says, such as mining stocks, which earn
dividends and avoid storage costs.
The metals analyst Mr. Morgan and Jim Puplava, a money manager and
chief executive of San Diego-based PFS Group, argue for holding
physical metal and not relying solely on mining stocks. While prices
trend together, there is some divergence.
Mr. Puplava points out that while gold was down 10% for the year,
the American Stock Exchange’s Gold BUGS Index was down more than 50%.
“When the price of the metal goes up, the mining stocks can go up
two or three times faster,” he says. This is because higher gold prices
mean rising profits for mining companies. Plus, the value of their
underground reserves increases. “Conversely,” he adds, “when the price
of metals goes down, you can see the price of stocks go down even
further.”
Wall Street
Journal – December 2008