Here at Advantage Gold we are frequently asked the question “why invest in gold?”
For an individual planning for retirement, whether you are considering investing gold for small savings or a more substantial long-term investment, buying gold into a self-directed IRA can help protect your wealth and can increase risk-adjusted returns. Having a modest amount of gold within a balanced retirement investment portfolio can potentially reduce the overall risk of the portfolio, helping to protect against down turns in the stock market.
Gold has also become more accessible to retirement investors, due to the development of a wide range of investment products, such as a Gold IRA, which investors can include in their retirement savings portfolio. The diversity of a retirement investment plan with a precious metal IRA that includes IRS approved precious metal products (such as gold, silver and platinum) means that gold can be used to enhance and create a wider variety of individual investment strategies and risk tolerances.
Here at Advantage Gold, one the top Gold IRA companies in the industry, we believe that having a self-directed IRA backed by IRS approved gold coins, bullion and bars and other approved precious metal products is a sound diversification of anyone’s retirement portfolio and a major reason someone should consider investing in gold as part of their retirement planning.
For more information about why you should consider investing in gold into your retirement portfolio or to discuss opening a Self-Directed Gold IRA today, please feel free to contact us or call us today at 800-341-8584 and speak to one of our IRA specialists.
Adding a gold component can greatly reduce your overall portfolio volatility, create a hedge against economic downturn, and add tremendous opportunity for gain. But with so many investments in the gold arena, how do you choose whether to invest in exchange traded funds (ETFs), mining stocks, or physical gold?
The category of gold stocks usually includes stocks and mutual funds comprised of companies that produce, refine, or explore for gold. Gold stocks have benefited tremendously from the meteoric rise in the prices of precious metals since the turn of the 21st century. Although some of these companies have earned extremely attractive returns over the years and continue to show promise, they simply are not the same as an investment in physical metals.
Investors that buy a gold mining stock bet on that company’s ability to make profits regardless of the price of gold. If the price of gold goes up but the costs associated with running that particular company also increase, then the mining company’s stock could actually decline in value. The values of exploration companies’ shares reflect those companies’ efficiencies and their ability to find gold. They are not a simple reflection t of the actual gold price.
Investing in individual stocks takes a lot of careful preparation, study and research that is entirely detached from the analyses of the overall gold market. We recommend that you speak with a licensed securities professional before you venture into this speculative arena.
An Exchange-Traded Fund (ETF) is similar to a mutual fund in that it tracks an asset or an index of assets. A gold ETF may hold various gold assets, including stocks in mining companies as well as gold reserves. Investments in Exchange-Traded Funds have soared in popularity since the turn of the century. Total capital invested in ETFs has soared from several hundred million dollars in 2003 to over $2 trillion today with an astonishing $15 trillion projected by 2023. That’s A LOT of paper!
ETFs offer fluidity in trading. ETFs are a favorite tool for high frequency traders, allowing them to quickly move in and out of positions multiple times a day. ETFs also offer the advantage of being able to participate in a particular arena (precious metals) without having to take physical ownership of any asset.
While the benefits of owning Gold ETFs may sound attractive, they have several detrimental qualities in relation to owning physical gold:
1. No Physical Possession
While Gold ETFs are made up of contracts and derivatives, and are redeemable for cash, at no time do you actually own a gold coin or bullion bar.
2. Low Trading Volumes
When ETFs have low trading volumes, the advantage of purchasing an ETF over a futures contract or equity diminishes. The bid-ask spread can be too wide to be cost-effective. While some of the more popular gold ETFs have tight spreads, other metal ETFs may not.
3. Long Investment Horizon
The intraday trading opportunities created by ETFs may not fit into a long-term investment strategy but benefit short-term ETF traders. As an investor, it will be important to layout your investing goals before you decide how ETFs fit in your portfolio.
ETFs, similar to mining company stocks, do not provide any real physical security.
A Metals-Backed IOU Is Still an IOU
The risks entailed in owning ETFs derived from precious metals are much the same as those of other financial instruments –counterparty risk. The gold and silver ETFs use futures contracts to buy and sell metals into and out of the funds. There is the risk of delivery failure, as well as a risk that some of the gold or silver bars owned by the fund are encumbered in some way.
Wealth-Corroding ETF Fees
Even if investors can overcome the fear of the significant systemic risks- they are still burdened with management fees for the ownership of ETFs. These fees will continually cause the ETF price to negatively diverge from the bullion price over time.
Paper Wealth vs. Real Wealth
ETF shares are supposed to be backed by the physical metal. Shareholders don’t own title to the metal itself but instead are effectively entrusting their wealth to the mega-banks that serve as the primary custodian for the ETF’s bullion. With the recent collapses of giant financial institutions such as Lehman Brothers, MF Global, IndyMac and Washington Mutual this is a risk may investors are shying away from. Many credible watchdog organizations already believe the major ETFs have partially backed some shares with derivatives instead of physical metals and are engaging in hidden leases, swaps, and commingling (risks that are even listed in some of the prospectuses for the ETFs)!
ETF investors own nothing more than a stock symbol in their portfolio. It is nearly impossible for retail investors to take delivery of the ounces of gold or silver that they think they own through ETFs.
Simply put, ETFs don’t insulate you from the risks inherent in the financial system. Although they can be useful to high frequency traders they are no substitute for owning physical gold and silver.