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Gold and silver IRAs: approach with caution
By MarketWatch | June 23, 2017

Here’s what the precious metals ads don’t say

Think twice before opening a gold or silver IRA.
By
KEVIN
MCKEAN
This article is reprinted by permission from NextAvenue.org.

For anyone worried about financial security in retirement, those ads touting gold and silver IRAs on conservative-leaning cable TV channels and from digital news outlets can sound pretty persuasive.

Take the Rosland Capital commercial where actor William Devane gets caught in a downpour while golfing. “Some things you just can’t control,” says Devane, “like runaway inflation or unstable governments printing money as worthless as wet scorecards. But you can control whether or not you let the money in your retirement lose its value.”

Then there’s the one from Lear Capital — like Rosland Capital’s, running on Fox News Channel — that asks the ear-catching question: “Would you like to own an asset that has the potential for a 60% increase or more?” Hard to say “No” to that.

You’ll find similar promotions on right-leaning websites, such as the ad in an email from Newsmax that says “your retirement account is in serious danger” or the one in a Breitbart.com email saying: “Warning: Economists Expect an 80% Stock Market Crash to Strike in 2017.”

What the gold or silver IRA ads say

These ads and others like them often include an appeal to put your retirement savings into a precious metals individual retirement account (IRA) either to make your money safer or help it grow faster. There’s generally no minimum investment and the advertiser shows you how to open the account and roll your existing IRA or 401(k) into it. The company then helps you convert that cash into precious metals by selling you gold or silver coins or bullion bars.

The advertisers’ preference for conservative media may be due to the fact that their ads tend to play on fears of financial collapse. The world is a dangerous place, they may say. Excessive national debt, inflation or even global upheaval could hammer the value of stocks, bonds and cash. So protect your money by putting it into hard assets that can survive a crisis — or, as Devane puts it, “an IRA backed by gold and silver, not by paper and promises.”

“They [the ads] are hitting every behavioral hot button to undermine people’s confidence in the asset management world,” says Christopher Jones, chief investment officer for Financial Engines, an asset allocation firm. “They’re trying to frighten people into thinking that the money they have in the bank is just a shadow that could be wiped out on a whim.”

The focus on retirement accounts makes sense because that’s where so many older Americans have their assets.

“So they are both preying on fear and going where the money is,” says Allan Roth, founder of the fee-only financial advisory firm Wealth Logic, of Colorado Springs, Colo. (We asked Rosland Capital and Lear Capital to comment for this article, but neither agreed to an interview.)

But are precious metal IRAs really a smart choice? Next Avenue talked to retirement and investment experts and found many reasons to be cautious — including high costs, relative volatility and a mixed investment record.

IRAs with a golden glow?

While most IRAs invest in conventional assets like stocks or mutual funds, the tax code also permits special “self-directed” or “alternative-asset” IRAs that can hold physical silver or gold. But not all precious metals are allowed. In fact, the law names specific gold, silver and platinum coins that qualify — like the American Gold Eagle — and defines purity standards for gold, silver, platinum or palladium bars in such accounts. Other coins and jewelry are forbidden.

The tax code also says the gold or silver must be held by an IRS-approved custodian or trustee, though some gold IRA marketers claim there’s a loophole in this law (more about this later).

But the evidence is mixed on whether owning gold can really keep your savings safe.

For starters, while gold can provide some insurance against inflation, just how much depends on your timing and patience.

“Gold does tend to hold its value in the long-term, but it is also volatile — roughly as volatile as stocks — so you may need decades to ride out its ups and downs,” says Campbell Harvey, the J. Paul Sticht Professor of Finance at Duke University’s Fuqua School of Business. “So gold would be at the bottom of the list [as an investment choice] for people who are retired or close to retirement.”

From 1981 through 2000, for example, when inflation nearly doubled, gold went more or less sideways.

Then in this century, the metal really took off. It rose by more than 500% from January 2000 (when it traded at around $280 per ounce) to a high of roughly $1,900 in August 2011, while inflation climbed only 34%. Since then, however, gold has fallen by about a third in value, to around $1,270 an ounce in mid-June, while inflation edged up 8%.

That big run-up during the early 2000s — which silver shared — is still helping precious metals salespeople paint dreams of lustrous gains. The Lear Capital TV ad, for example, says that, “if silver just returns to half of its all-time high, it would be a 60% increase.” Fair enough. But if it sagged to around twice its recent low, you would suffer a very painful 50% loss.

Caution: possible price bumps ahead

That’s why even investors who generally favor gold, such as Russ Koesterich, a portfolio manager for the BlackRock Global Allocation Fund, advise you to treat precious metals with the same caution you would any other physical asset, such as real estate. Over time, property tends to rise in value. But in a down market, like the 2008 recession, people can lose their shirts — and homes — to plummeting prices.

“The problem with gold,” says Koesterich, “is that there’s no logical reason why this shiny metal should be a store of value — except that everyone has sort of agreed for thousands of years that it is.” That’s why you still see investors flock to gold in a crisis, as they did one day in mid-May when the Dow Jones Industrial Average plunged 372 points in a single day, while gold prices spiked by nearly 2%.

Where is gold headed? Investment pros offer no consensus.

Koesterich says a modest amount of gold in a portfolio (say, 3 to 5%) might help provide diversification if other assets slump. But Harvey and former commodities trader Claude Erb argue that gold’s big gain during the 2000s left the metal hugely overvalued compared with historical norms. In a paper published last year, they calculated that if gold returned to its “fair value” compared with inflation over the next 10 years, it would lose about 4.4% a year.

“You can go out and buy a Treasury Inflation-Protected Security, or TIPS, that will give you the same return with a lot less volatility,” Erb points out. (A TIPS is a type of U.S. Treasury bond whose principal is guaranteed to increase with inflation.)

The TIPS comparison brings up one key difference between precious metals and other investments: they have no income stream, such as the interest on a bond or dividends from a stock, to cushion their price swings. . .

http://www.marketwatch.com/story/gold-and-silver-iras-approach-with-caution-2017-06-23

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