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With gold trading at or near record price levels, maintaining an investment position in it for your retirement portfolio seems like a natural move. But what are the advantages and risks, and what are the best ways to hold it in your plan? Similarly, should you consider silver?

The Argument for Gold and Silver

There are compelling reasons to be invested, even at current price levels.

  1. Gold can be your best investment friend during times of crisis. Precious metals seem to thrive on crisis and instability. This makes a strong case for keeping at least some metals (gold more than silver) in your retirement portfolio at all times. And more during periods of crisis.
  2. Gold is the ultimate inflation hedge. It’s often said that at any time in history, one ounce of gold would buy an expensive man’s suit. With the gold price currently around $1,250 we know that to be true today. Silver has sometimes been a hedge, but it’s less reliable.
  3. The rise in gold prices has been spectacular over the past 40 years. In 1971 the price of gold was $35 an ounce; recently it’s been trading in the $1,300 range—that’s an increase of more then 3700%! By contrast, the S&P 500 traded at around 100 in 1971; recently it’s being hovering around 2400, for an increase of 2400%. The returns aren’t even close. (Silver on the other hand, has been less reliable. Silver traded for about a dollar in 1971; it’s recently been hovering around $18 for a 1800% increase.)
  4. Gold and silver are tangible. Most other investments are pieces of paper representing a claim on physical assets or revenue streams. Gold and silver are actual commodities—hard money, so to speak—and because they represent value unto themselves their prices will never crash down to zero or even something close to it.

The Argument Against Gold and Silver

As perfect as precious metals can seem during bull market runs like the one we’re seeing now, there are significant downsides.

  1. Gold and silver pay neither interest nor dividends. Not only does this mean that you won’t earn income on your investment, it also means that investment will lack a critical support in the event that prices fall.
  2. Gold and silver are countercyclical investments. They perform well in certain economic environments, such as periods of crisis or inflation, but tend to fall and stagnate during periods of stability and growth. Silver has been especially volatile.
  3. Gold and silver prices have a history of being erratic. Periods of sharp price increases are followed by declines that can last for decades. The current bull market in gold that began in 2001 had been flat or declining for more than 20 years previously.
  4. Current prices. Gold prices are high and have been rising for more than a decade; the potential for a significant drop can’t be ignored. You may be buying at the top of the market if you buy in now. Silver has already dropped significantly since 2011, when it was at $41.47 an ounce.

Best Ways to Own Gold and Silver in Your Portfolio

There are different ways to own gold and silver in a retirement plan, and you can even hold bullion coins in a self-directed IRA.

Gold and Silver Bullion.

Many common bullion coins are permitted to be held in IRA accounts (Traditional, Roth and SEP). Gold coins must be .995% pure while silver coins must be .999%. Such coins as the American gold and silver Eagles, American Buffalo gold coins, Canadian Maple Leaf gold coins and Mexican Silver Libertads qualify. Other coins, such as the Krugerrand (which are only .900% pure) are excluded, as are collectible and numismatic coins.

The IRA trustee must be set up to purchase and store bullion coins, as you will not take physical possession of them. If your IRA trustee does not handle bullion coins, you can set up a separate IRA with one that does, sometimes called a “gold IRA.” There are fees associated with holding gold in an IRA—application fees, annual account fees and storage fees for actually holding the gold. These can run several hundred dollars a year.

Exchange-Traded Funds (ETFs).

This is a less direct—but much more convenient—way to own gold bullion. Exchange Traded Funds (ETFs) are essentially gold depositories, so your shares represent a fractional share of the company’s physical metal holdings. The shares track the price of gold, cost far less than bullion coins to buy and hold, and are easily traded. Some examples of gold ETFs include SPDR Gold Trust (GLD), iShares COMEX Gold Trust ETF (IAU) or ProShares Ultra Gold ETF (UGL).

Precious Metals Stocks and Mutual Funds.

These are not actually precious metals because when you buy them you’re buying the productive capacity of the company behind the stock, and not the metal itself. That’s an important distinction because while share prices generally correspond to long-term price trends in metals, the connection is hardly exact.

Stock prices of metals-related companies (mostly mining companies) can fall when metal prices are rising, and rise when prices are falling. This is because there are a host of factors concerning mining companies beyond metal prices. A mining company is a business (not a metal depository) and must operate in a world where labor costs, strikes, regulatory issues, interest rates and politics play critical roles. In addition, since many mining operations are located in unstable regions of the world, civil unrest and war are always possible.

Precious-metals stocks are speculations, and by extension, so are the mutual funds that invest in them (though many mutual funds do hold minority positions in bullion). Even advocates of precious-metals investments concede this point. If you do decide to make a play in precious metals using stocks or mutual funds, recognize that it will be speculative and be sure to keep your investment at the most minimal level. This is a very specialized investment area, and very few people have even the slightest understanding of how it works.

Should You Add Gold and Silver to Your Retirement Portfolio?

Taking the long view, gold and silver (probably more gold than silver) should occupy some portion of any well-balanced investment portfolio. Their ability to hold value over the long run and to increase substantially during periods of crisis and inflation are obvious. But they should be viewed more from a standpoint of capital preservation, and not seen as either short term plays or get-rich-quick schemes.

ETFs are probably the best way to hold them, since they are liquid and low cost to buy and hold. Bullion coins have too many fees and stocks and mutual funds are pure speculations. No matter how metals are held, they should represent a small percentage of your overall portfolio, freeing up the bulk of your money for income-producing investments in other areas.

 

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