From 1933, it was considered illegal to store your wealth in gold. However, a 1997 Congressional bill made it possible for investors to own gold by boosting their investment portfolio with a gold IRA. The idea that you can trade your paper-based assets for gold is quite alluring to most investors. However, most new investors are oblivious benefits and risks are associated with gold IRAs.
Gold’s allure
Conventional IRAs allow the holder to invest in mutual funds, stocks and government securities. However, paper-based assets are vulnerable to inflation and economic downturn as seen during the recession. One reason investors are attracted to gold is that during economic turmoil, the value of gold tends to rise. Adding a gold IRA to your portfolio can be considered as an insurance against inflation and other economic shocks.
However, not all gold can be held in an IRA. All precious metal bars and coins need to adhere to IRS standards before they can be held by an IRA trustee. This does not mean that gold IRA trustees have gold stashed in their premises. Instead, they are required to hold their gold in an IRS-approved depository.
During the 2008 financial recession, gold was the only asset that was protected from the financial shocks. In fact, the demand for gold shot up the value of gold growing the portfolio of gold IRA holders. Many companies streamlined the rollover to gold IRAs, making it easier for investors to diversify their portfolios using gold.
Additionally, the geopolitical risk of paper-backed assets means that your portfolio is never guaranteed. Company stocks can become worthless, as in the case of Lehman Brothers, and countries can default on bonds, leading to substantial loss of your hard-earned savings. However, regardless of the fluctuation of value, gold will always hold residual value.
The risk
Despite the benefits associated with having a gold IRA, there is a significant risk. First is the price volatility of gold. Like most precious metals, gold prices can swing drastically. Regardless of the estimates, a fiduciary advisor may offer, no one can predict either appreciation or decline in the value of gold. It is as easy for the value of gold to appreciate as it is to decline.
Additionally, storing gold in a depository means that it is subject to physical theft. Even though the depository is insured, the likelihood is that the insurance will only reimburse a portion of the value of gold held. The one basket adage is an adequate warning to anyone who wants to delve into gold IRAs.
Bottom line
All investments have an element of risk and gold is not an exception. Like most precious metal, it is very volatile. In 2016, the price volatility averaged 15.8 percent, and at one point, it even reached 28.4 percent change in value. Despite the volatility of gold, its endearing aspect is its ability to act as an alternative investment. Gold can always provide a cushion against inflation and other economic shocks. The caveat is that a gold IRA, no matter how appealing, should not be used as your primary investment. Instead, experts suggest that gold IRAs should account for no more than 20 percent of your investment portfolio. Read our reviews of gold IRA companies and custodians here.
