WHAT YOU NEED TO KNOW IF CONSIDERING INVESTING IN GOLD.
There are a number of various reasons why you should consider investing in gold, especially as an IRA investment, none more than the diversification of your investment / retirement portfolio.
In 1997, Congress passed the Taxpayer Relief Act which allowed investors to put away gold and other metals into a self-directed IRA. They were responding to investors who wanted to diversify their retirement portfolio from paper assets like cash, stocks, and bonds to add some tangible assets.
Edmund Moy, who is the leading Strategist for The Fortress Gold Group and was also the Director of the US Mint between 2006-2011, stated the following an article he wrote in September 2014: (click here for original source)
“By 2013, the total amount of assets held in all the Individual Retirement Account’s set up in the USA totaled 6.5 trillion dollars, and out of that amount 2.5 – 4 percent were now in non-traditional forms, such as gold.“
He went on to state:
“And looking long-term, there are several risks that favor the continued growth in gold IRAs, such as the fragile global economic recovery, potential of aggressive inflation in the United States, growing concern of a major stock market correction and increased geopolitical risks.”
When it comes to building a diversified investment portfolio, investing in alternatives from the normal investments, needs to be considered. The main reason being that diversification helps balance out the variances in values of other types of investment commodities. Sometimes an investor may be heavily invested in a particular type of investment such as stocks or ETF’s, but with a diversified portfolio, they may well have stocks from various sectors from the retail sector to the tech sector and so on.
When one of these sectors, such as the oil sector, is going through a bad patch, as it is at the time of writing this, the chances are good that sectors such as retail or tech stock may be doing quite well. This not only balances out losses from the oil sector, but it can actually help to increase the value of a portfolio significantly over time.
LISTEN TO BILLIONAIRE INVESTOR KEVIN O’LEARY EXPLAIN WHY HE DIVERSIFY’S HIS PORTFOLIO WITH GOLD INVESTMENT
INVESTORS WANT MORE DIVERSIFICATION
True effective diversification is not just diversifying stocks and ETF’s, it is much more than that. More and more investors are looking to broaden their horizons by investing in things like REIT’s, corporate bonds, gold, and silver, as well as stocks and ETF’s.
BullionVault, who are a leading peer-to-peer gold-and-silver-bullion exchange, based in London, recently produced their annual report and analysis on how varying assets have performed over the last 40 years (1976-2015) in both the UK and the USA. (see report here)
As you can see from the facts below, although not the number one performing asset, gold has beaten other key assets in its returns over the past 40 years and has this century outperformed corporate bonds by a considerable margin.
ASSET PERFORMANCE LAST 40 YEARS
- Gold’s 40-year change (+669% gross of costs) has beaten inflation (328%), housing (598%, excluding costs + yield) and cash (cumulative 535%).
Commodities have dropped below end-1975 levels (-3.05%);
- REITs are the best-performing asset both since 1976 (9,177% cumulative on reported performance before costs) and also so far in the 21st century (up 484% since 1999);
- Gold is the next best performer since 1999 (+340%) and then corporate bonds (160%);
Since 1976 gold rose in all 3 years when US stocks lost 10% or more, averaging 9.6% gains. It averaged 11.3% when REITs fell the same, rising on 3 of 5 occasions;
- Cash interest rates have lagged inflation 16 times since 1975. Gold rose in all but 4 of those years, three of them 2013-2015;
WHAT ARE THE PROS & CONS OF GOLD INVESTMENT?
WHAT ARE THE PROS TO INVESTING IN GOLD?
A Shelter Against Volatility
The answer to why an investor should purchase this kind of investment is multifaceted. The first reason to invest is because it can be used as a hedge of protection against market volatility and inflation. Market volatility can affect the value of gold, but it typically affects it much less than other types of investments. One of the reasons for this is that the value of stocks, bonds and ETF’s are based on paper money and not in gold.
Protection from Inflation-Deflation
Inflation has always been a concern because inflation weakens the value of paper money. However, gold does not labor under the same constraints as paper money. It has a value that is established mainly through demand. Paper money can be weakened when there are shifts in power from one country to the next, or when there is some sort of political upheaval. In some cases, paper money can be rendered completely worthless, should the affairs of a particular country get bad enough. It is in these situations, gold benefits the investor.
Gold has had a remarkable performance during times of inflation and also deflation. Inflation is basically a period when the economy of a nation is struggling and the cost of living is high. During these times, gold prices tend to increase and that’s why it is often regarded as a ‘hedge against inflation’. Deflation, on the other hand, is when the economy is also struggling and business activity is quite slow. During deflation, it has been seen to perform well too.
Another thing to consider is its value. As you can see from the price chart below, the value of gold did skyrocket some years back, at one point reaching almost $2000 per ounce. Since then it has slipped to around $1200 per ounce (Current gold price can be found in the sidebar to the right). There is some discussion as to its value throughout the rest of 2017. Some experts are expecting gold to experience an explosion in value sending it closer to $2000 per ounce again. Other investors feel that while gold may not rise to this level, its values will steadily increase throughout 2017. Regardless, gold is at a good value and purchasing gold at current prices may be a wise investment as it is poised to increase in value, both in the short-term and the long-term.
WHAT ARE THE CONS TO INVESTING IN GOLD?
While we do think that gold is a good investment, there are downsides to investing in it, just like there are downsides to investing in anything. Therefore you really must consider your reasons as to why you want to invest in it or any other of the precious metals, before you start out.
It doesn’t produce cash.
What we mean by that is, if you are looking to invest for the sole purpose of generating cash on a regular or short-term basis, gold is not the investment type you want. Precious metals don’t pay out a dividend, therefore if that is what you need to consider stocks.
Don’t think of it as a short-term investment
OK, we all know that you make your money when what you have invested in increases in value. While Gold has increased considerably in value over the past 20 years, over a limited time frame we see the value of gold bounce in both directions. We are not saying you can’t make money short term, if that is what you want to do, you are going to have to be checking its price almost like a Hawk on a day to day basis. But if you take the view that investing in it is for the long-term and it is for diversification, then you can buy it and leave it alone without stressing as to whether it’s going to make you any money tomorrow.
WHAT ARE THE OPTIONS FOR INVESTING IN GOLD?
There are various ways in which you can invest in gold. You can do so through ETF’s, closed-end funds, and only stocks such as mining companies. But we want to talk about two particular options for your consideration: Buying physical gold outright and holding it in a vault/depository outside the banking system and secondly investing it into a gold IRA rollover.