Because of the recent price swings in gold and other precious metals, it’s critical to think about not just whether to keep precious metals in your IRA but also what sort to hold. Unlike a traditional IRA, a gold backed IRA allows you to own actual precious metals as well as rare metals mutual funds, shares in mining firms, and precious metals ETFs.
When it comes to choosing which sort of precious metals to retain in your IRA, both physical and so-called paper rare metals have distinct traits, so it’s vital to understand the varied elements that influence their performance.
Whenever the stock market is in a crisis, some investors turn to safe-haven assets such as precious metals. While gold, silver, and palladium all have their levels of volatility, many investors feel they are better long-term investments.
Physical precious metal cannot be held in a traditional individual retirement account (IRA). However, precious metal IRAs allow you to invest in gold, palladium, silver, and other valuable metals for retirement.
A precious metal IRA is a type of self-directed personal retirement account that focuses on precious metals.
“Adding gold or rare stones to your retirement account can help protect your wealth in a variety of ways, including lowering potential investment volatility and risk, acting as a hedge in the event of an economic downturn, and offering a tax-efficient shelter for future earnings,” according to the article.
Paper or Securities Precious Metals
For the most part, individual precious metals equities, rare gemstones mutual funds, and exchange-traded funds (ETFs) benefit from being highly liquid vehicles. They can also offer leverage to the price of the metals they are linked to, which is usually gold or silver in most situations.
While these securities are tied to precious metals, they are also exchanged on stock or futures markets, and as a result, they are more likely to move in tandem with other financial assets than the metal to which they are related.
This is one reason why actual precious metals, including gold and silver coins and bullion, may exchange at a premium over paper precious metals since the physical is not seen to be as susceptible to non-fundamental price changes. Furthermore, unlike actual precious metals, paper precious metals are subject to counterparty risk.
Risk of a Counterparty
Counterparty risk is the risk that the party on the opposite side of a transaction that asset would fail to deliver on its commitments, not the risk of the security or asset itself. When a company goes bankrupt or fails, for example, something occurs.
While insurance programs exist to defend against this in specific situations, they do not cover every form of security or asset, nor do they protect against the possibility that the paper system as a whole may fail, however unlikely.
While paper precious metals offer certain benefits over actual precious metals in terms of liquidity and leverage, they are vulnerable to price swings that are not always fundamentally driven and counterparty risk. As a result, many investors prefer to include actual precious metals in their IRA portfolios.
Physical Precious Metals
One reason investors may wish to consider storing real precious metals is the lack of counterparty risk stated earlier. Despite the recent drop in the gold price, physical gold, silver, and other precious metals merchants throughout the world have witnessed an upsurge in buying gold, silver, and other precious metals. Due to the inflow of buyers, premiums over spot prices that investors must spend to acquire precious metals have skyrocketed.
While the decline in gold prices has allowed purchasers to purchase gold and silver at what they may perceive to be bargain prices, another factor for the increasing interest in buying might be the financial crisis.
With the small EU country of Cyprus recently “bailing in” its banks and inflicting steep penalties on holders of substantial quantities in those institutions, the attractiveness of owning assets like precious metals that escape counterparty risk may be regarded as more appealing.
If you decide to keep precious metals in your IRA, there’s no one-size-fits-all answer regarding which sort is ideal for you. Given the advantages of owning real precious metals as mentioned above, it may be worthwhile to invest at least a part of your precious metals assets in physical assets of this sort.
