We're glad we hoisted our Crash Alert flag when we did.
Yesterday, markets all over the world plunged to new lows...with the Dow closing below 7,000 for the first time since 1997. At 6,763...it has only a couple of thousand points left to go. Then, we can begin looking for the bottom.
"World markets are taking the long-dreaded 'next leg down'." Writes John Authers in the Financial Times. "The more hopeful scenarios for a swift economic rebound must now be jettisoned..."
What caused yesterday's sell-off, according to the papers, was this statement:
"With the benefit of hindsight, the group wishes that it hadn't made this investment."
Thus saith Mr. Michael Geoghegan, head of HSBC, the world's biggest bank. HSBC bought America's "Household Finance" for $15 billion in 2003. Now, it wishes it hadn't. The U.S. unit 'destroyed' $10 billion in capital, says the bank.
Of course, almost every investor in the world could say the same thing. No matter where they put their money, it got destroyed. We all wish we hadn't done something.
And it's not over.
HSBC is closing down its entire U.S. consumer finance business - some 600 shops nationwide.
California says it is suffering an "avalanche of job losses." Across the country, jobless benefits are at a record high.
AIG is getting another $30 billion in bailout money. The New York Times calls it "propping up a house of cards."
Another house of cards is General Motors. It just reported a loss of $31 billion on sales of $149 billion. By our quick calculation, it must have lost about $3,000 on every car it sold.
GM has already gotten a loan of $13.4 billion from the government. Now, it wants $16 billion more. (And poor Detroit...pity the parasites...more below...)
And don't forget Fannie Mae. Fannie made a loss of $25 billion...now she's drawing more money from the government too - an additional $15 billion.
Good money after bad. But the whole consumer economy is a house of cards....
Remember, this is a Depression...with a capital D...not a recession. It's a depression because it requires a perestroika of the economy...a restructuring, not just a breather and bailouts. The debt cycle is now turning in the other direction. America could be creeping back towards a 10% savings rate - as predicted here in The Daily Reckoning - and now taken up by Nobel-prize winner Paul Krugman. Savings bottomed out in the United States in 2006, when the rate went negative. Now, they're moving higher - fast.
This is good news for the people doing the saving, but it is the kiss of death to the consumer economy. Somehow, businesses have to get along without adding more debt to household balance sheets. House-builders have to make a profit by building houses only for people who can actually afford them. Malls have to give up on customers who spent money they hadn't earned yet. Every business in the world has to adjust to the new economy.
Economists call it the 'paradox of savings.' Savings are good for the individual, but when savings rates go up, spending goes down. The economy suffers. Then, people lose jobs and income, further depressing economic growth.
Many economists came to believe that a little inflation was a necessary thing, since it discouraged saving. But people will believe anything if you give them enough education. They also thought derivatives were a healthy innovation, since they dispersed risk...and that subprime debt was a service to the nation, since it made it possible for people to buy houses they couldn't otherwise afford.
But now it's the "Revenge of the Glut," says Krugman. He's referring to another stupid idea economists had: that the United States was doing the world a favor by consuming Asia's glut of savings.
Suddenly, Americans have wised up. They aren't carrying water for Asia's savers any more. As a result, the huge reservoirs of dollar savings in Asia aren't filling up like they used to. And as a consequence (as yet unnoticed by most commentators), Asians aren't going to be in a position to buy so many T-bonds.
Now Americans are saving for themselves. A welcome trend, as far as we're concerned...even if it does bring a Depression.
*** The Oracle of Omaha has spoken - and he is still optimistic about the U.S. economy. The excerpt below comes from his annual letter:
"Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15-25% for many years. America has had no shortage of challenges.
"Without fail, however, we've overcome them. In the face of those obstacles - and many others - the real standard of living for Americans improved nearly sevenfold during the 1900s, while the Dow Jones industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Mr. Buffett has been unflinchingly positive on the U.S. economy, and is often seen as the lone voice in the wilderness when it comes to seeing the current situation as optimistically as he does. The same holds true with his interview for I.O.U.S.A. You can read the full transcript of his interview in the I.O.U.S.A. companion book, which is available as a part of our "Emergency 'Personal Bailout' Bundle"...along with the I.O.U.S.A. DVD and a free special report. Get yours here.
*** We're back from our vacation with a tan...well, an Irish sort of tan. We came away with a bet too. A Nicaraguan investor has wagered that the price of Russian energy producer Gazprom will rise more than gold over the next five years.
Our Nicaraguan friend is a serious investor...and a serious student of Russian investments. While we lost money in India, he lost money in Russia. So, we were even. But now, he's thrown down the gauntlet.
"Gold is not a very good investment," he points out. "If you take it over the last 30 years, it has produced negative returns. The price is barely higher than it was 30 years ago, while the consumer price index has probably doubled. And even if you're right about gold now, how much do you expect to make? Maybe it doubles. Maybe triples. But Gazprom is a real company with a real product that people really need - energy. It's been beaten down with the rest of the Russian market. But it will come back. And when it does, it has the potential to do much better than gold. For one ounce of gold today you can buy 74 shares in Gazprom. I'll bet that that ratio is lower 5 years from now - meaning that gold goes up less than Gazprom. How much do you want to bet?"
It was not the sort of bet we like. Because we don't really have an opinion about Gazprom; we don't follow it. Still, we took the bet for $10.
"You're on the right side of that bet," said colleague Simone Wapler, editor of the French version of MoneyWeek. "Of course, we don't know what will happen, but gold is low risk. Gazprom is not. Putin can take away Gazprom's profits any time he wants. Who knows what will happen in Russia?"
*** The cover story at the Economist: "The Collapse of Manufacturing."
Factory output in the United States just declined for the 13th straight month. Why make things if people can't buy them?
*** Want to save money? Sell your house. Move to Detroit. The median house in the Motor City sold for $7,500 in December. How about that, dear reader? You can buy a house for the same price as the Dow stocks. A little low on cash? Put it on your credit card.
Of course, then you've got to live in Detroit. The papers report that life in the city is so grim 1,000 people move out every month.
We've never been to Detroit. Out of curiosity, we offered to take Elizabeth for a romantic getaway to Detroit for her birthday. Our offer drew this reply:
"Are you out of your mind?"
Poor Detroit. No one goes to the city for a holiday. Not even students. As near as we can tell people only go there if they have to. And then, they get out as soon as they can.
We can imagine what it is like. We lived in the Baltimore ghetto for nearly 10 years. If you want to know what it is like, there's a TV show that chronicles life there - The Wire.
Was it disagreeable living in the inner city? No, it would have to undergo major improvements to be disagreeable. It was Hell. Drug dealers on the street corners. Trash in the alleys. Everybody with a pistol in his pants and a chip on his shoulder.
Elizabeth was once on the phone with her brother.
"What's that noise in the background?" he asked. "It sounds like popcorn popping."
"Oh, that's just someone shooting in the alley," Elizabeth replied. "I think they're trying to settle an argument."
We'd been there too long. Elizabeth hadn't even noticed the gunfire.
But it shows what government can do when it tries to fix a problem. In the case of Detroit and Baltimore, the government provided massive bailouts. Education standards collapsed...so the government provided money to the local education bureaucracy. Jobs disappeared (largely because people couldn't read or write)...so the government provided massive bailouts in many different bureaucracies - training centers, welfare, food stamps. Pretty soon, the only industry left was the welfare bureaucracy.
We don't know how it works now, but when we lived in the ghetto a girl's best career path was promiscuity. She got more money with each child she had...provided, of course, that the father didn't take responsibility for it. Then, the child grew up...took drugs and stole cars...until he got sent to prison. One problem led to another - but it could all be traced to the government's giveaways. They had the same effect in Baltimore as they had in Burkina Faso. The political elite took the money and lined their pockets...the masses become more miserable than before. And the worse conditions got, the more money the cities received from federal bailout programs.
Baltimore is still in business. But from what we read, Detroit sounds like it has become a kind of Port-au-Prince with snowdrifts. The whole city sounds like a hellhole without the warm fires.
And now Obama is proposing to make things worse. More bailouts...more giveaways...more programs...more bureaucrats... Already, the 'rich' support whole sections of the population. Obama says he will raise taxes on 'the rich,' creating even more parasites. Of course, who cares if the rich have less money? They will still live in their leafy suburbs and send their children to private schools. But pity the poor parasites.
Neither Mr. Obama nor none of the candidates for Mayor of Detroit (the last mayor is doing time in a federal penitentiary) has asked for our advice. We will give it anyway. Want to save Detroit? Here's how:
Abolish all welfare of all sorts...no unemployment insurance...no child tax credits...no welfare...no foodstamps...no nothing, except privately-sponsored charities. Close the public schools. Kick out all the bureaucrats and all federal and state employees. Abolish all rules concerning employment - no minimum wages, no overtime, discriminate all you want. Require all residents to say please and thank you...dress properly...and sneer at people who don't seem to be gainfully employed or polite. Declare the city an Open City and Free Trade Zone. In exchange for cutting all federal aid programs, eliminate federal and state taxes for people living in the city. Allow unlimited immigration into the city...giving all immigrants a U.S. passport after 5 years of residency. Levy a flat 10% tax to pay for basic services. Eliminate elections...have the city controlled by a town council composed of 10 citizens chosen at random.
Within five years, Detroit would be the most dynamic city in the nation.
Yesterday, markets all over the world plunged to new lows...with the Dow closing below 7,000 for the first time since 1997. At 6,763...it has only a couple of thousand points left to go. Then, we can begin looking for the bottom.
"World markets are taking the long-dreaded 'next leg down'." Writes John Authers in the Financial Times. "The more hopeful scenarios for a swift economic rebound must now be jettisoned..."
What caused yesterday's sell-off, according to the papers, was this statement:
"With the benefit of hindsight, the group wishes that it hadn't made this investment."
Thus saith Mr. Michael Geoghegan, head of HSBC, the world's biggest bank. HSBC bought America's "Household Finance" for $15 billion in 2003. Now, it wishes it hadn't. The U.S. unit 'destroyed' $10 billion in capital, says the bank.
Of course, almost every investor in the world could say the same thing. No matter where they put their money, it got destroyed. We all wish we hadn't done something.
And it's not over.
HSBC is closing down its entire U.S. consumer finance business - some 600 shops nationwide.
California says it is suffering an "avalanche of job losses." Across the country, jobless benefits are at a record high.
AIG is getting another $30 billion in bailout money. The New York Times calls it "propping up a house of cards."
Another house of cards is General Motors. It just reported a loss of $31 billion on sales of $149 billion. By our quick calculation, it must have lost about $3,000 on every car it sold.
GM has already gotten a loan of $13.4 billion from the government. Now, it wants $16 billion more. (And poor Detroit...pity the parasites...more below...)
And don't forget Fannie Mae. Fannie made a loss of $25 billion...now she's drawing more money from the government too - an additional $15 billion.
Good money after bad. But the whole consumer economy is a house of cards....
Remember, this is a Depression...with a capital D...not a recession. It's a depression because it requires a perestroika of the economy...a restructuring, not just a breather and bailouts. The debt cycle is now turning in the other direction. America could be creeping back towards a 10% savings rate - as predicted here in The Daily Reckoning - and now taken up by Nobel-prize winner Paul Krugman. Savings bottomed out in the United States in 2006, when the rate went negative. Now, they're moving higher - fast.
This is good news for the people doing the saving, but it is the kiss of death to the consumer economy. Somehow, businesses have to get along without adding more debt to household balance sheets. House-builders have to make a profit by building houses only for people who can actually afford them. Malls have to give up on customers who spent money they hadn't earned yet. Every business in the world has to adjust to the new economy.
Economists call it the 'paradox of savings.' Savings are good for the individual, but when savings rates go up, spending goes down. The economy suffers. Then, people lose jobs and income, further depressing economic growth.
Many economists came to believe that a little inflation was a necessary thing, since it discouraged saving. But people will believe anything if you give them enough education. They also thought derivatives were a healthy innovation, since they dispersed risk...and that subprime debt was a service to the nation, since it made it possible for people to buy houses they couldn't otherwise afford.
But now it's the "Revenge of the Glut," says Krugman. He's referring to another stupid idea economists had: that the United States was doing the world a favor by consuming Asia's glut of savings.
Suddenly, Americans have wised up. They aren't carrying water for Asia's savers any more. As a result, the huge reservoirs of dollar savings in Asia aren't filling up like they used to. And as a consequence (as yet unnoticed by most commentators), Asians aren't going to be in a position to buy so many T-bonds.
Now Americans are saving for themselves. A welcome trend, as far as we're concerned...even if it does bring a Depression.
*** The Oracle of Omaha has spoken - and he is still optimistic about the U.S. economy. The excerpt below comes from his annual letter:
"Amid this bad news, however, never forget that our country has faced far worse travails in the past. In the 20th century alone, we dealt with two great wars (one of which we initially appeared to be losing); a dozen or so panics and recessions; virulent inflation that led to a 21.5% prime rate in 1980; and the Great Depression of the 1930s, when unemployment ranged between 15-25% for many years. America has had no shortage of challenges.
"Without fail, however, we've overcome them. In the face of those obstacles - and many others - the real standard of living for Americans improved nearly sevenfold during the 1900s, while the Dow Jones industrials rose from 66 to 11,497. Compare the record of this period with the dozens of centuries during which humans secured only tiny gains, if any, in how they lived. Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead."
Mr. Buffett has been unflinchingly positive on the U.S. economy, and is often seen as the lone voice in the wilderness when it comes to seeing the current situation as optimistically as he does. The same holds true with his interview for I.O.U.S.A. You can read the full transcript of his interview in the I.O.U.S.A. companion book, which is available as a part of our "Emergency 'Personal Bailout' Bundle"...along with the I.O.U.S.A. DVD and a free special report. Get yours here.
*** We're back from our vacation with a tan...well, an Irish sort of tan. We came away with a bet too. A Nicaraguan investor has wagered that the price of Russian energy producer Gazprom will rise more than gold over the next five years.
Our Nicaraguan friend is a serious investor...and a serious student of Russian investments. While we lost money in India, he lost money in Russia. So, we were even. But now, he's thrown down the gauntlet.
"Gold is not a very good investment," he points out. "If you take it over the last 30 years, it has produced negative returns. The price is barely higher than it was 30 years ago, while the consumer price index has probably doubled. And even if you're right about gold now, how much do you expect to make? Maybe it doubles. Maybe triples. But Gazprom is a real company with a real product that people really need - energy. It's been beaten down with the rest of the Russian market. But it will come back. And when it does, it has the potential to do much better than gold. For one ounce of gold today you can buy 74 shares in Gazprom. I'll bet that that ratio is lower 5 years from now - meaning that gold goes up less than Gazprom. How much do you want to bet?"
It was not the sort of bet we like. Because we don't really have an opinion about Gazprom; we don't follow it. Still, we took the bet for $10.
"You're on the right side of that bet," said colleague Simone Wapler, editor of the French version of MoneyWeek. "Of course, we don't know what will happen, but gold is low risk. Gazprom is not. Putin can take away Gazprom's profits any time he wants. Who knows what will happen in Russia?"
*** The cover story at the Economist: "The Collapse of Manufacturing."
Factory output in the United States just declined for the 13th straight month. Why make things if people can't buy them?
*** Want to save money? Sell your house. Move to Detroit. The median house in the Motor City sold for $7,500 in December. How about that, dear reader? You can buy a house for the same price as the Dow stocks. A little low on cash? Put it on your credit card.
Of course, then you've got to live in Detroit. The papers report that life in the city is so grim 1,000 people move out every month.
We've never been to Detroit. Out of curiosity, we offered to take Elizabeth for a romantic getaway to Detroit for her birthday. Our offer drew this reply:
"Are you out of your mind?"
Poor Detroit. No one goes to the city for a holiday. Not even students. As near as we can tell people only go there if they have to. And then, they get out as soon as they can.
We can imagine what it is like. We lived in the Baltimore ghetto for nearly 10 years. If you want to know what it is like, there's a TV show that chronicles life there - The Wire.
Was it disagreeable living in the inner city? No, it would have to undergo major improvements to be disagreeable. It was Hell. Drug dealers on the street corners. Trash in the alleys. Everybody with a pistol in his pants and a chip on his shoulder.
Elizabeth was once on the phone with her brother.
"What's that noise in the background?" he asked. "It sounds like popcorn popping."
"Oh, that's just someone shooting in the alley," Elizabeth replied. "I think they're trying to settle an argument."
We'd been there too long. Elizabeth hadn't even noticed the gunfire.
But it shows what government can do when it tries to fix a problem. In the case of Detroit and Baltimore, the government provided massive bailouts. Education standards collapsed...so the government provided money to the local education bureaucracy. Jobs disappeared (largely because people couldn't read or write)...so the government provided massive bailouts in many different bureaucracies - training centers, welfare, food stamps. Pretty soon, the only industry left was the welfare bureaucracy.
We don't know how it works now, but when we lived in the ghetto a girl's best career path was promiscuity. She got more money with each child she had...provided, of course, that the father didn't take responsibility for it. Then, the child grew up...took drugs and stole cars...until he got sent to prison. One problem led to another - but it could all be traced to the government's giveaways. They had the same effect in Baltimore as they had in Burkina Faso. The political elite took the money and lined their pockets...the masses become more miserable than before. And the worse conditions got, the more money the cities received from federal bailout programs.
Baltimore is still in business. But from what we read, Detroit sounds like it has become a kind of Port-au-Prince with snowdrifts. The whole city sounds like a hellhole without the warm fires.
And now Obama is proposing to make things worse. More bailouts...more giveaways...more programs...more bureaucrats... Already, the 'rich' support whole sections of the population. Obama says he will raise taxes on 'the rich,' creating even more parasites. Of course, who cares if the rich have less money? They will still live in their leafy suburbs and send their children to private schools. But pity the poor parasites.
Neither Mr. Obama nor none of the candidates for Mayor of Detroit (the last mayor is doing time in a federal penitentiary) has asked for our advice. We will give it anyway. Want to save Detroit? Here's how:
Abolish all welfare of all sorts...no unemployment insurance...no child tax credits...no welfare...no foodstamps...no nothing, except privately-sponsored charities. Close the public schools. Kick out all the bureaucrats and all federal and state employees. Abolish all rules concerning employment - no minimum wages, no overtime, discriminate all you want. Require all residents to say please and thank you...dress properly...and sneer at people who don't seem to be gainfully employed or polite. Declare the city an Open City and Free Trade Zone. In exchange for cutting all federal aid programs, eliminate federal and state taxes for people living in the city. Allow unlimited immigration into the city...giving all immigrants a U.S. passport after 5 years of residency. Levy a flat 10% tax to pay for basic services. Eliminate elections...have the city controlled by a town council composed of 10 citizens chosen at random.
Within five years, Detroit would be the most dynamic city in the nation.
Within the last year, 401(k)s and IRAs have ceased to be a safe haven for Americans' nest eggs. In 2008, employees lost on average 14%, or about $10,000, of their retirement money. Those with more than $200,000 are even worse off - they lost more than a quarter of their savings. No wonder that more and more people are asking whether they can, or should, use an Individual Retirement Account (IRA) to hold physical gold. Our answer to the first part of the question is yes, indeed you can. The tax rules governing IRAs leave room for gold. But our answer to the second part is equivocal.
In 1986, as the U.S. Mint began issuing gold coins for the first time since 1933, a tax rule against holding "collectibles" in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin. The easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE).
The only stipulation is that all bars and all coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. Numismatic coins are also impermissible for an IRA.
The procedure for putting gold into an IRA is somewhat more complicated than with paper assets, but the requirements aren't onerous.
To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Don't look to your discount broker or a fund family like Vanguard; they won't touch the stuff. Instead, you'll need a specialist like the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust. These are the most respected names in the business. An Internet search will turn up others, and if you do your due diligence on them, you might find one that works for you.
But remember that it's especially important to choose a custodian with a solid reputation, because your gold will be stored at a location twice removed from you. A firm such as GoldStar or Sterling would be merely your IRA's legal custodian; for vaulting your IRA gold, it will employ a certified depository, likely either HSBC Bank USA (which is also a COMEX gold depository) or Delaware Depository Services.
So chances are you'll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy. (Dropping in coins you already own is against the rules - a "prohibited transaction.") And if you want to mix in some paper - for example, to consolidate your gold, ETF, and mining stock holdings into one account - that's fine, too.
The custodian will charge either a fixed annual fee or a percentage of the IRA's value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.
You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000, or a "catch-up" limit of $6,000 for those 50 and over. Custodians generally set their minimum initial investment at that $5,000 mark but will accept smaller subsequent contributions.
When the time comes to withdraw from your gold IRA, you don't get any coins or bars, alas. You get cash. The custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA.
That takes care of the how-to. The trickier part is whether it's a good idea. For most readers, the answer is likely no. Here's why.
The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5K or $6K. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.
Physical gold, of course, doesn't generate income. So you might be wasting part of your IRA's tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.
Does that mean it never makes sense to have physical gold in an IRA? No. There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold.
No-income portfolio. If you've decided that the outlook for bonds and dividend-paying stocks is so bleak that you don't want any at all, then putting gold into your IRA won't crowd out any income-earning investments.
Strategic switching. Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.
IRA Only. If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to buy gold may be the only way for you to hold it.
In researching this, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.
He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight to quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.
Making the move is simple if the pension fund is already an IRA. You're free to transfer funds from an IRA that's invested in stocks or anything else directly into a gold IRA.
Or if the pension fund is run by your employer, when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.
In 1986, as the U.S. Mint began issuing gold coins for the first time since 1933, a tax rule against holding "collectibles" in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin. The easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE).
The only stipulation is that all bars and all coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. Numismatic coins are also impermissible for an IRA.
The procedure for putting gold into an IRA is somewhat more complicated than with paper assets, but the requirements aren't onerous.
To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Don't look to your discount broker or a fund family like Vanguard; they won't touch the stuff. Instead, you'll need a specialist like the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust. These are the most respected names in the business. An Internet search will turn up others, and if you do your due diligence on them, you might find one that works for you.
But remember that it's especially important to choose a custodian with a solid reputation, because your gold will be stored at a location twice removed from you. A firm such as GoldStar or Sterling would be merely your IRA's legal custodian; for vaulting your IRA gold, it will employ a certified depository, likely either HSBC Bank USA (which is also a COMEX gold depository) or Delaware Depository Services.
So chances are you'll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy. (Dropping in coins you already own is against the rules - a "prohibited transaction.") And if you want to mix in some paper - for example, to consolidate your gold, ETF, and mining stock holdings into one account - that's fine, too.
The custodian will charge either a fixed annual fee or a percentage of the IRA's value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.
You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000, or a "catch-up" limit of $6,000 for those 50 and over. Custodians generally set their minimum initial investment at that $5,000 mark but will accept smaller subsequent contributions.
When the time comes to withdraw from your gold IRA, you don't get any coins or bars, alas. You get cash. The custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA.
That takes care of the how-to. The trickier part is whether it's a good idea. For most readers, the answer is likely no. Here's why.
The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5K or $6K. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.
Physical gold, of course, doesn't generate income. So you might be wasting part of your IRA's tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.
Does that mean it never makes sense to have physical gold in an IRA? No. There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold.
No-income portfolio. If you've decided that the outlook for bonds and dividend-paying stocks is so bleak that you don't want any at all, then putting gold into your IRA won't crowd out any income-earning investments.
Strategic switching. Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.
IRA Only. If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to buy gold may be the only way for you to hold it.
In researching this, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.
He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight to quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.
Making the move is simple if the pension fund is already an IRA. You're free to transfer funds from an IRA that's invested in stocks or anything else directly into a gold IRA.
Or if the pension fund is run by your employer, when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.
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