Retirement investors concerned about economy are turning to precious metals

By Tim Grant

Newmont Mining via APIt used to be that an IRA could be funded with only cash, stocks or bonds, but Congress has expanded the rules governing individual retirement accounts to include gold and silver bars and coins. And more investors who are concerned about turbulence in the U.S. and global economies are taking advantage of that option.

"When you get into very volatile markets and people are afraid of stocks and bonds, they look for safe havens, and gold has always been a safe haven," said Nadav Baum, managing director of investments at BPU Investment Group, Downtown.

Transactions for precious metals IRAs have increased 523 percent in the past eight months at GoldStar Trust Co., a leading custodian for self-directed IRA accounts, based in Canyon, Texas, said Trey Hightower, a precious metals specialist.

GoldStar's IRAs allow investments in gold, silver, platinum and palladium bullion bars and coins. Its precious metal assets under management were valued at $312 million as of Dec. 31, 2007.
"The economy and the weak dollar is driving a lot of people into precious metals," Mr. Hightower said.

Traditional and Roth IRAs that contain precious metals operate under the same rules as conventional retirement accounts. The metals cannot be withdrawn from the account without penalty until the investor reaches 59 1/2 years old and withdrawals are required starting at age 70 1/2.

But the roundabout process of setting up a precious metals IRA is where the similarities end.
Investors must contact a self-directed IRA custodian who handles precious metals accounts. Once that account is open and funded with cash, the customer then contacts a coin dealer and locks in a price for the metals.

The IRA custodian issues a purchase order to the coin dealer and the metals are shipped to a depository, such as HSBC Bank in New York. Once the custodian gets confirmation from the depository that the metals have arrived, the custodian documents it into the IRA account and pays the coin dealer.

"The customer never holds the metals while they're in the IRA," Mr. Hightower said. "But they can sell the metals within the IRA and take a cash distribution or take the metals out as a distribution."

The combination of dollar weakness, falling interest rates and rising inflation has created an ideal environment for rising precious metals prices. Gold, which recently traded above $1,000 a troy ounce, is known as a crisis commodity. It tends to appreciate in value under the worse economic conditions.

In 1997, gold and silver bullion were approved for IRAs. But only gold coins having a purity of 24 karat are allowed in the retirement accounts, with the exception of the 22 karat U.S. Gold Eagle. The South African Krugerrand is not permitted in an IRA because it is a 22 karat bullion coin.
David Morgan, a world renowned silver expert and founder of silver-investor.com in Spokane, Wash., said he was familiar with the handful of IRA custodians who handle precious metals and was not aware of any problems with any of them.

"I'm not advocating you put all your IRA money into gold and silver," Mr. Morgan said. "There are a lot of people whose main savings is an IRA account, and therefore they should put at least 10 percent in precious metals."

One of the most innovative ways to buy and sell precious metals in an IRA was recently introduced by the Entrust Group, based in Reno, Nev. Through its partnership with GoldMoney.com, investors can buy and sell digital gold, which allows the movement of physical gold bullion in their IRAs from one account to another online.

James Turk, founder of GoldMoney.com, based in the British Channel Islands, said he believed that the trend in gold would continue upward until problems related to the U.S. dollar have been solved.

"Gold, as we know, is an inflation hedge," he said. "But people are starting to understand its other attribute, which is a catastrophe hedge. Gold is a tangible asset which is not dependant on someone else's promise."

Mr. Turk said GoldMoney is an online bank account that is denominated in gold grams and mills rather than dollars and cents. The precious metals in GoldMoney accounts are stored in Zurich, Switzerland. Investors can always sell their gold and have the proceeds sent to an IRA custodian in the United States.

The downside of holding precious metals in an IRA is the account owner must pay storage fees to the depository where the metals are held. And there are often big spreads in the buying and selling exchange rates.

Those fees can make bars and coins an expensive way to diversify a low-balance portfolio, which is why many financial advisers prefer to put clients into gold and silver exchange traded funds, which are traded on the stock market.

"There's not much advantage and a lot of disadvantages in having physical bullion," said Bruce Fenton, president of Atlantic Financial in Boston. "What happens if it's stolen or it melts? You don't have to worry about that if it's electronically protected."

Donald Gould, president of Gould Asset Management in Claremont, Calif., said it makes sense to own gold as part of a diversified portfolio, but that it doesn't make sense to hold gold bullion in an IRA.

"An IRA is a tax-deferred vehicle," he said. "It makes sense to put [assets] in there that have high current taxable income. Gold pays no interest or dividends.

So therefore, using your IRA to buy gold is an inefficient use of [the IRA] from a tax perspective."

Whether or not it's a good time to be buying gold is debatable, said Paul Burkemper, president and founder of Burkemper Group in St. Louis.

He thinks gold could be overpriced in the current environment. There will be an adjustment, and prices tend to fall faster than they rise.

"My concern is a lot of people will jump into gold chasing returns, thinking it won't go down," said Mr. Burkemper, whose firm specializes in IRA and retirement planning and distribution. "We thought home prices wouldn't go down, and we got a rude awakening."

Given all the factors that influence the price of gold and what's happening in the economy, James DiGeorgia, author of "The New Bull Market In Gold," is predicting gold will trade at $2,500 a troy ounce in three to five years. Silver will trade in the $30 an ounce range, and platinum will top $5,000 an ounce, he said.

Craig Smith, CEO of Swiss American Trust, a full service brokerage firm for early American coins in Phoenix, said customers who prefer to own the physical metal have a different psyche than those who want paper assets.

"Your physical gold is your asset and no one else's liability," Mr. Smith said. "You don't have to depend on anyone else to perform, and that's what we like about gold.

"When people plan for retirement they want to be sure the money they put away will be enough to maintain their standard of living, and gold always maintains its buying power."

Tim Grant can be reached at tgrant@post-gazette.com or 412-263-1591.