Should you add gold to your retirement portfolio?
In turbulent economic times, gold shines as a way to reduce your investment risk. But should you invest in gold? The answer depends on current conditions as well as your own personal financial situation.
Recently the price of gold has been tumbling due to comments from Federal Reserve Chairman Ben Bernanke. Bernanke has emphasized the Fed’s desire to keep inflation low, which in turn makes gold less desirable as a protection against price increases. On Dec. 4, there was a $5.40 (0.5 percent) tumble in gold for December delivery, placing the metal at $1,163.40 per ounce on the New York Mercantile Exchange’s Comex division. Analysts see this as an important – if potentially short-lived – correction to what has in recent years proven a strong bull market.
So is this the time to buy? If so, how much is appropriate – and how are gold purchases handled?
It’s important to remember that investing in gold is different than other investments such as stocks or bonds. A true gold investment means being able to take physical possession of the metal in the form of gold bullion. Other ways of investing in gold include buying stock in gold futures contracts, gold mining and producing firms, or gold-focused exchange traded funds (ETFs).
According to most financial planners, you should have gold as less than 10 percent of your investment portfolio. It’s important to strike a balance between owning too little gold and becoming a gold hoarder – those who believe that the world is going to end tend to stockpile gold as it can be used to barter for food and services during times of emergency.
Once you’ve decided how much money to allocate for gold purchases, it’s time to figure out the way in which you want to invest in the metal. The means of investment listed above are described here:
- Gold bullion. This is considered by some to be the most stable and liquid form of gold since you can physically take possession of it.
- Gold stocks, which are actually stocks in a gold mining company. Unlike gold bullion, you’re not buying physical gold with this method, but rather stocks in a business.
- Gold futures, where you agree to trade gold at a later date, but with predetermined amounts and prices.
- Gold-focused exchange traded funds, an investment vehicle based on stock exchanges which attempts to track gold prices. ETFs are known for low cost and tax efficiency. However, some argue that they do not provide sufficient portfolio diversification.
Buying gold for your IRA, and gold coins in particular, can be a tricky procedure. While some plans may not offer this capability, others might as a result of the 1997 Tax Payer Relief Act. This allowed for precious metals to be purchased in IRA accounts.
In order to purchase gold for your IRA, you will need to set up a self-directed IRA account with a custodian who allows for alternative investments. In addition, your gold must be stored at an IRS-approved location, and in order for the IRS to approve gold coins as an IRA investment, they must be 99.5 percent pure gold. This is very important because not all gold coins are 99.5 percent pure. If the coins you buy fail this measurement, the investment could be considered prohibited, and your IRA could be hit with hefty taxes and penalties.
Talk to your financial advisor to find out if investing in gold makes sense for your own financial picture.