Personal Finance

Gold Standard for Your IRA: Little Bit Goes a Long Way

Richard Satran, Personal Finance Editor
Anthony Bradshaw | Photographer's Choice RF | Getty Images

Gold bugs have ruled the money world for more than a decade as their favorite investment topped every other asset category since 2000.

But 2012 has been tough for precious metals enthusiasts, especially those who crammed them into retirement accounts as a "safe-haven" during times of crisis. It sold off again Wednesday in trading linked to the further decline of Europe's currency.

In the past four months, gold has fallen sharply, and while it has been only the second such sustained drop in a stellar decade, the last downturn came during the market collapse of 2008.

This year it’s the euro zone crisis that’s making gold less precious, providing a fresh lesson for those who seek the comfort of the so-called hard currency in times of strife.

“There is a generation that viewed gold as a safe haven,” said Diane Pearson, a money manager for Legend. "It was true 20 or 30 years ago but it’s a different environment now.”

Warren Buffett was one of the force majeures against gold this week — nothing new there. He has never been a precious metals buff. His minion Charles Munger also badmouthed it during the downturn by saying “civilized people don't buy gold."

Gold bugs came out of the woodwork to trash the Oracle of Omaha, gloating that they did better than Berkshire Hathaway in the past decade.

It's fine for IRAs to include gold. But retirement is a long-term proposition and that is how you have to treat an investment.
                 CEO Ed Slott and Co retirement specialists. 
ED Slott 

Adding to the insult, some said the octogenarian might be losing Midas touch — a cheap shot, considering he held his view since he was a much younger investor. Buffett avoided the ups and downs of the "gold boom" in the late 1970s as inflation roared and gold soared. But as a peerless equity investor, he has always maintained that value comes from corporate earnings streams and not inert metals. Over the long term, he’s been right. Gold sank into a three-decade depression circa 1980.

But the decade-long rally is hardly a short-term phenomenon, and gold still holds its allure for some. It has a place in diversified portfolios, Pearson said, but it is best taken in limited doses. “Five percent is plenty, in a diversified portfolio,” she says.

But there is “no real need” to put it inside a tax-free retirement account. “It’s a “low priority” at best, she says. IRAs should be for securities with predictable income streams that can better use the tax protection.

Indeed, many advisers say gold backers have gone way too far in peddling precious metals to  retirees as a sure thing for the future.

When Investors Should Beware

“Watch for the warning sign — when they say it is ‘an IRS approved investment’ for your IRA they are wrong. The IRS does not approve anything. All it says is that that it allows certain assets for a tax protected account,” saidEd Slott, who heads the retirement consulting firm Ed Slott and Co.

The IRS ruled clearly in 2007 that bullion can be part of an IRA. So can real estate and other alternatives to stocks and bonds. “Anything but life insurance and collectible,” says Slott.     Since the ruling, there has been an explosion of gold-related exchange traded fundsthat make it easier than ever to put gold into a retirement fund.  

For bullion to be part of an IRA it must be held by a custodian and certified as 99.5 percent pure. Some sellers have made “IRA approved” a part of their sales pitch. In response, the IRS issued a stern directive saying anyone making the claim that IRS has sanctioned any specific investment are committing fraud.

“There are plenty of good people in the (bullion) business, but some of the custodians (at bullion houses) are not keeping great records of expenses,” says Pearson. This can cause headaches for those who need quick access to their funds, and expense records at tax time.

For typical IRAs  there are simpler ways into gold — including the first-ever and still most popular SPDR Gold Trust (GLD) contract and most heavily traded bullion ETF, and a reasonably good proxy for the gold bars. Its prices mirror the physical market’s spot price reasonably well.

Gold for Golden Years

“It’s fine for IRAs to include gold. But retirement is a long-term proposition and that is how you have to treat any investment in one. Look at it long term,” says Slott. “If you feel you want a portion of gold in an IRA as a hedge against inflation it is probably not bad to hold some. But it is speculative. And you have to watch it a lot. Some people like to do that.”

A bit of gold in a retirement account is not going to do much to hedge for inflation, Slott said. And its crisis performance has been unimpressive. There was only a very brief surge during the catastrophic Fukushima nuclear disaster, for example.

But it has been close to a sure bet when it comes to dollar hedging. Put simply it takes more dollars to buy gold every time the U.S. currency declines a notch. Europe’s crisis boosted the dollar as fund traders dumped euros. As a result gold fell.

Pearson is not keen on gold as an IRA staple, but she not a gold bear, either. A renewed downturn in the dollar as Europe’s financial crisis eases could spark a turnaround in gold, Pearson says. Gold mining stocks have been hit even harder than bullion and so might provide the most dramatic bargain buying prospects.

“There might be a trigger here soon,” she says. “It’s on a downward slope now but I don’t see much more of a dip. When the credit crisis eases in the euro zone I have a feeling people will be turning back to gold.”

But for retirement accounts it’s still best to be wary, she says. “It’s definitely not the be-all and end-all that some people think.”