How to Own Gold in an IRA – But Should You?

by ETF Base on October 7, 2010

With pundits and investors alike touting gold as the hedge against the falling dollar, inflation, and the Apocalypse, a natural question investors are starting to ask is what are the various ways they can invest in gold, and for longer term investment horizons, how to hold gold in an IRA. 

How to Own Gold in an IRA

There are a few options for investors seeking to hold gold in their IRA:

  • ETFs – The most popular gold ETF is (GLD) which tracks the underlying price of gold bullion, but you can also own miners via (GDX), speculate a big with Gold Miner Juniors via (GDXJ), or if not having access to your gold keeps you up at night, the Sprott Gold (PHYS) option allows investors access to their gold which some prefer over (GLD) since they don’t trust that the custodian could deliver if called upon.  Note that the Sprott fund trades at a premium to NAV and opens itself up to arbitrage via gold pairs trades when that premium spikes.
  • Physical Gold Bullion – For the very wealthy and those who are distrustful of the claims of the ETF custodians, there is an option to pay a private custodian to hold gold for you in your name.  You’d need to set up a self directed IRA with a custodian who in turn will procure gold from their network of dealers.  You can then transfer money to that custodian up to the max for the year or even from an existing IRA account.  Once you buy the gold in the desired format of gold, coins, or otherwise, the new IRA custodian will ship the gold to a holding depository to be held on behalf.  You should anticipate transaction costs and management fees along the way of course.
  • Other Precious Metals ETFs – While gold gets all the headlines, gold may not even be the precious metal that gives you the best performance!  As outlined in this article on ETFs beating gold, some of the other metals are outperforming; just watch those leveraged ETFs for the long-term, as they all go to zero in the end.

SHOULD You Invest in Gold in an IRA?

I was once told by a very wise man on a completely unrelated topic, “Just because you CAN do something, it doesn’t mean you SHOULD do it”.  Well, this may very well be one of those cases.  The advent of ETFs, metals custodians and middle-men peddling their services on late night television has opened up opportunities for retirement accounts that didn’t exist previously.  Before jumping head first into investing in gold at all, let alone, for the long-term, let’s think about some of the risks involved:

  • Gold doesn’t pay a dividend or coupon – Stocks and bonds do.  In fact, dividends are almost half the return of stocks over 20 years!  Even if they decline in value, often times the market will set an artificial floor and buoy declines since the future cash flows have an intrinsic value to investors.  Held long enough, vehicles with steady payouts like some of the few remaining AAA companies paying dividends and bonds will return to parity and dividend growers will give you capital appreciation as well!  Gold will never grow because it’s not paying or increasing a dividend.  It will only continue to go up in value in terms of your local currency as investors doubt the value of that currency, which may only be a 2010s phenomena.  We just don’t know.
  • This May Be a Bubble – It is completely plausible that you buy into gold now at $1350/oz and end up selling it 20 years from now at $1000/oz.  Gold travels in very long secular trends and we may be at a peak or we may just be getting started.  It’s tough to say, but it’s possible the market has gotten ahead of itself.
  • Gold has Carrying Costs – Regardless of whether you’re holding bullion, paying a custodian to hold it, or you’re buying it through an ETF, it’s expensive to transport, store, protect and monitor significant stores of gold.  Over decades, the additional fees associated with the storage and protection of gold could really add up, very much negating any benefits.

So, there you have it.  If you’re insistent on owning gold in an IRA, there are some options for you.  You can always buy gold in a traditional taxable manner, but make sure you understand the various gold tax rule since they vary depending on your investment vehicle.

Disclosure: Author holds GLD in a traditional trading account.

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