“Gold is a relic. It isn’t considered ‘legal tender.’ Most of my friends don’t own it, save a few pieces of jewelry. It doesn’t yield anything.”
Part of this is true. But strangely, central banks across the globe still keep it in reserve, as if it were the backstop to the international financial system. What’s going on?”
Sure, it’s confusing, especially to many investors who are new to gold. But as you’re probably aware, interest in the gold market has been exploding; with capital inflows surging as safe-haven demand became a top priority among investors amid the pandemic’s economic aftermath.
Given the current circumstances, people feel the overwhelming need to protect their wealth. Typically, investors turn to bonds. But with interest rates near zero, bond yields are anything but attractive. Investors may also turn to cash (as the saying goes, “cash is king”). But as the Federal Reserve aims to raise inflation to match an “average” 2% target, the value of cash is guaranteed to fall; purchasing power, guaranteed to erode. Cash is far from being the safe investment it was once perceived to be.
Some investors seeking gold today remember the 2008 crash; many of whose investments were badly burned. Others may be younger millennials who are aware of the dangers that monetary and fiscal policy pose to wealth preservation. They are seeking protection outside of the fiat currency system.
But like every investment, there are inherent risks. And many first-time gold investors are probably worried about the risks in investing in gold (even as a means to hedge risks, as ironic as that may sound). Although there may be no risk-less investment, there are safer investment practices. We’ll get to that in the last part of this article. For now, let’s address four questions that often keep first-time gold investors from taking that first step.
Will My Gold Perform Well Against Stocks?
There’s an old saying: “a picture is worth a thousand words.” So, here we go: a picture of Gold versus the S&P 500, Dow Jones Industrial Index, and the Nasdaq 100 from 2000 to 2020.
Now, the words. Trevor Gerszt, CEO of Goldco, wrote in a Newsmax article:
“Many people assume that stocks will always be the best investment for building wealth over the long term. But that isn’t always the case.”
It’s a sloppy pair of sentences--the kind that makes potential gold investors shy away from the industry. Not because it's overtly deceptive (it can be), but because it’s so vague; it betrays a thinker uninformed, not with regard to gold, but in the deceptive details of the slippery language.
Let’s improve it:
- Many investors assume that only stocks comprise the best wealth-building strategy over the long term (which we know isn’t the case, as stocks can fall during a secular bear market or can lose dollar value during periods of inflation).
- Too many investors stake their entire wealth in equities without diversifying it into other asset classes (like precious metals, real estate, emerging markets, etc.).
- Stocks may be your best investment for achieving portfolio growth, but they shouldn’t take precedence over-diversification using other return sources.
After all, we’re not suggesting that you convert 100% of your assets (or even close to it) into gold. And although it’s true that stocks may not “always be the best investment for building wealth over the long term,” Gerszt fails to mention other alternatives for diversification. His article, then, is nothing more than a cheap and unimaginative sales pitch--written to serve his company’s interests, not yours.
Look, gold is an effective asset for portfolio growth, capital preservation, and diversification. How much of it should you allocate? Well, during a gold bull market, you’ll have to decide just how aggressive you want to be. As a safe haven asset (capital preservation), you have to check the inflationary environment and decide how much of your capital you want to hedge. Whether it's 5%, 10%, 20% or more. That’s up to your risk tolerance and long-term financial goals.
Will gold perform well against stocks? Often it does. Sometimes, it's just another return source. Will gold perform well in an inflationary environment? Yes, it will. But that doesn’t mean you have to dump all your stock holdings. Diversify and stay balanced. What better can you do?
How Can I Make Sure My Gold is Safe?
First, ask yourself: safe from what or whom? If you're worried about thieves, don’t store it in your house. Find a safe and reputable precious metals depository. If you own gold in an IRA, then make sure your custodian is storing your physical metals at a depository (which is likely to be the case).
Are you worried about the possibility of government gold confiscation? It’s happened before, and there’s no guarantee that it won’t happen again. In that case, buy only non-CUSIP metals that aren’t monitored by the government or the banking system. Problem solved (or most of it, at least).
Is My Gold Safe From Uncle Sam’s Tax Collectors?
Great question. First, talk to your tax advisor to get the most accurate and up-to-date information on this matter. But generally, know that investing in gold outside of an IRA, the IRA being a tax shelter, is very different from holding gold as part of your IRA portfolio.
If you hold gold outside of an IRA, it’s considered a “collectible,” believe it or not. In contrast, gold in an IRA will be taxed at your marginal income tax rate once you begin taking distributions. Hopefully, by then, your marginal tax rate will be lower upon retirement. But since you used your pre-tax dollars to buy gold, taking distribution when your marginal tax rates are lower is something of a win/win situation (pre-tax to buy, low tax to withdraw).
Also, note that you can roll over any existing assets in a retirement plan--401(k), 403(b), 457, TSP, and even an IRA--into a gold IRA. That gives you an extra advantage in flexibility and shelter should you feel the need to add an extra gold hedge to your existing assets. In other words, you can avoid the taxes and penalties for withdrawing funds to buy gold outside of an IRA.
How Might I Know What Kind of Gold to Buy?
The decision between two forms of physical gold--coins or bars--may seem easy at first. But it does involve some homework on your part. If you decide to invest through a gold IRA, then your range of choices may be a bit narrower, making it a little easier for you to make a decision. Why narrower? Because gold IRAs must comply with certain standards regarding metal content. This means that only a certain number of coins and bars are available for investment through an IRA.
Still, whether you decide to invest in gold through an IRA or not, it helps to talk to a specialist regarding the values of different numismatic coins (should you decide to go in that direction). At GSI Exchange, we can explain all of the different options available to you. Our goal is to help you decide what might be the best match for your financial goals based on your financial resources, needs, and time-to-retirement.
Now is the Time to Invest in Gold As Inflation is Guaranteed to Rise
Gold has pulled back from its record high. Yet despite hovering just below all-time-high territory, the fundamental reality of the COVID economy is set to push gold prices even higher. The Federal Reserve is now taking a pro-inflationary stance, aiming to push the inflation rate not to 2% but toward a 2% average. This means it has to overshoot its target so that inflation “averages-out” to 2%. In addition to this, there’s more fiscal spending ahead, as the government works toward stabilizing an economy that’s been ravaged by COVID-19, with millions still unemployed, and businesses still unable to operate at pre-pandemic levels. As you know, there’s still no lid on the pandemic. This means more economic uncertainty ahead.
Although no person can ever predict the exact turning point of an economy--whether up or down--uncertainty on the horizon and high inflation are all but guaranteed. Now is the time to protect your wealth and assets from the erosive effects of inflation and market volatility. The longer you wait, the longer your cash and dollar-based assets depreciate. Plus, you may be missing out on one of the longest and strongest gold bull markets in history. Call us today, and let us help you find the right allocation to match the lifestyle you envision for your future.