Why Invest in Gold for IRA Accounts? Gold ownership in an IRA is a hedge for stock market volatility.
Individuals aged 50 and older (subject to modified Annual Gross Income limits) can contribute $7,000 annually to a self-directed or Roth IRA in 2021.
Investors with Traditional IRAs or 401(k) retirement plans can “roll-over” the assets to a self-directed plan with similar income tax benefits.
Investors quickly learn that paper profits in the stock and commodity markets are fragile. Prices of paper assets move up and down rapidly, increasing 10%-15% almost overnight before falling 30%-40% in a single week.
No profit is safe in a rapidly changing world battered by pandemics, political strife, and unpredictable technology that simultaneously destroys and creates whole industries. At the end of an investment period, success is not what an investor makes but what they keep. When you invest in gold, you increase the odds of keeping more.
The Rise of Economic Uncertainty
Few people have the desire and opportunity to work until death. Consequently, building a significant well diversified asset base during working years is critical. Recognizing the importance of personal savings for retirement, the Federal Government enacted the Employee Retirement Income Security Act of 1974, allowing individuals to establish and manage Individual Retirement Accounts (IRAs).
According to the latest IRS statistics, Americans had established more than 11.5 million IRAs with a market value exceeding $8 trillion by the end of 2018. The average portfolio value for those aged 65-70 was $274,342.
The Primary Concerns
While tax advantage is critical to good investment growth, an unprecedented period of economic and financial uncertainties threaten future investment returns and stability:
- Future Pandemics: The emergence of new Covid variants foreshadows the likelihood that other virulent diseases transferred from animals to humans are more likely as humans encroach on historically remote areas.
- Global debt levels. Countries worldwide struggle to manage extraordinary debt levels and maintain civil and social investments. Governments initiate laws and regulations to protect domestic companies from foreign businesses, triggering trade wars, rising tariffs, and increasing costs.
- Increased international dependencies. Supply chains are increasingly complex, often stretching across borders and oceans. Efforts to halt Covid have exacerbated worker shortages in ports worldwide, especially in the United States. Hundreds of container ships wait in offshore queues, facilities have no storage space, and manufacturing plants cannot source critical components.
- Climate change. Though scientists dispute the cause of global warming, no one denies its presence nor its cataclysmic results without intervention. World weather patterns are changing with the melting of the polar ice caps, the anticipated variation of the Gulf Stream, and widespread violent storms. In 1980-2021, the United States averaged 7.1 weather disasters costing more than $1 billion each. In the most recent five years, the average number of events more than doubled (16.2).
- Instantaneous, global connectivity. News, rumors, misinformation, and fraud influence the price of securities and commodities. In 2013, an unknown entity hacked the Associated Press (AP) news line and reported the injury of President Barack Obama in an explosion. Before the news proved false, the S & P 500 stocks had lost more than $136 billion.
Correction Potential
A Fall 2021 survey of stock market analysts found that 86% believe that a stock market correction of at least 10% is at any time. According to long-term bull market optimist Jim Paulson, a noted investment strategist, “We are way overdue for a correction, and we're going to get one. I would be trying to diversify away from the S & P 500, which I think might take the brunt of it.”
Invest in Gold as a Volatility Hedge
“Volatility” is the rapid up-and-down movement of an investment's value. It attempts to quantify existing levels of uncertainty about the future that affects investors' decisions whether to buy, hold, or sell an asset. It's virtually impossible to predict precisely when the top or bottom of a market will be. When you invest in gold, you're taking these possibilities seriously.
Investors who retire during down markets, ceasing to add to their investments, can permanently suffer income losses. Investors whose portfolios are concentrated in equity investments such as mutual funds, ETFs, and individual common stocks that choose not to invest in gold or other hard assets are especially vulnerable to bear markets and economic recessions. Astute investors manage volatility through portfolio diversification and hedging strategies, especially in the decade before retirement.
Portfolio Diversification
Diversification is a time-tested method to manage multiple types of risk – market risk, credit risk, liquidity risk, and event risk. Insurance companies minimize the impact of a single fire by covering a population of houses across a vast geography. Mutual fund managers reduce the risk of losses in a single investment by owning shares in multiple companies in multiple industries.
Concentration is a high-risk, high-return strategy that is acceptable when the impact of a loss is slight. Buying a lottery ticket for $5 and failing to win has little effect on most purchasers' lifestyles. On the other hand, liquidating a retirement fund to buy lottery tickets would be unthinkable for a sane investor.
Effective diversification of an investment portfolio involves holding a variety of investment types for maximum protection. A portfolio of diverse stocks remains vulnerable to broad market declines. A portfolio of bonds and fixed income can lose value when interest rates rise. Real estate properties experience similar volatility as stocks and bonds. Cash depreciates from inflation. The purpose of diversification when you invest in gold or other assets is not to maximize profits but to minimize losses.
The Importance of Hedging
“Hedging,” a strategy to reduce risk, has been popular with astute investors for centuries. Simply put, hedging is owning financial assets with opposing investment features to protect a portfolio's total value. If asset A rises in value, asset B declines in value or remains unchanged. If asset A falls in value, asset B increases in value. In other words, hedging functions like a child's seesaw (or teeter-totter) where the ends of the board move in opposite directions.
While diversification reduces investment risk by diluting or spreading the possibility of loss, hedging reduces risk by pairing investments with opposite responses to the same stimuli.
This relationship is called “correlation.” Correlation between two assets is expressed on a scale ranging from +1.0 to -1.0.
A coefficient of +1.0 signifies a perfect correlation where values move in the same direction to the same degree. In contrast, a -1.0 signals that the two assets move in opposite directions to the same degree.
A coefficient of 0 indicates that the assets are not correlated. Theoretically, the perfect hedge would be two assets that move in opposite directions in the same proportion, i.e., -1.0.
Invest in Gold as Hedge Against Uncertainty
Increased volatility and lower returns from traditional investments are reasons to consider adding gold to your retirement portfolio. Gold has a weak correlation with the stock market (0.14 to 0.25, according to the measurement period). This makes gold a good candidate to diversify a portfolio and hedge against market declines. A review of gold's price action during stock market decline since 1986 indicates that the precious metal has performed exceptionally better than stocks during past market declines since 1980.
Investors know that volatility for the shares of individual companies in different industries is considerably higher than a market index of 500 stocks. As diversification decreases, market risk and volatility increase.
Today's uncertain market environment is ideal for retirement savers to consider the advantages an inclusion of gold may potentially bring to their savings. Protecting investment balances in retirement accounts such as IRAs is especially critical due to their use. For that reason, investing 5%-15% of the account's value is recommended. Many investors begin with a small percentage in their younger investment years and increase it as they approach retirement. The goal of a diversified retirement account is not achieving maximum returns, as that would require assuming a greater risk of loss.
Final Thoughts
Deciding to invest in gold by diversifying from Traditional IRAs or 401(k) accounts to a self-directed IRA may seem daunting. Fortunately, the process is simple, though following IRS guidelines is mandatory to avoid subsequent investment problems.
An experienced gold IRA professional will help you through the steps to open an account and invest in gold. Your IRA will include an asset that has proven to be an excellent store of value for centuries.