A Refresher on Some of The Basics of Investing in Gold
Many of you may be feeling rewarded for your faith in gold because of the recent bump up in the price. It’s nice to be able to prove the skeptics are wrong. We’re right there with you. Feeling pretty smug.
While some people look down on gold as a fool’s investment, those of us who truly understand the facts know that in reality it’s one of the safest and best investments you can make.
Gold almost always beats the rate of inflation. In fact, the rise in the price of gold exceeded the cumulative rate of inflation by more than ten times over the last ten years. Not many safe investments can boast that kind of return.
Even though the price of gold took a bit of a beating over the last 12 months or more, gold owners who stayed the course did so because they know that gold always wins in the end.
Case in point. Some experts are even predicting gold prices of more than $1,500 an ounce next year.
With the price now just under $1,200, if that prediction comes true it could mean a great year for people with strong positions in gold.
And if you don’t have a position in gold, now is a great time to start investing.
Gold in your IRA
By the way, while we’re on the subject of things people say about investing in gold that have no basis in fact –
You absolutely CAN hold gold in an IRA. There is no law or rule preventing you from enjoying the benefits of gold in your retirement account.
In fact, gold is an excellent addition to your retirement account. As we say over and over, gold is a great investment.
- It is safe.
- It holds its value.
- The price nearly always goes up year over year.
- It is one of the best ways to protect your money from inflation.
Holding gold is even fun and exciting. What more can you ask from an investment?
All that being said, there are just a few restrictions on putting gold and precious metals into an IRA. Of course, a gold or precious metal IRA follows all the same rules as any other IRA. And there are other restrictions to a tax advantaged gold IRA.
You can’t just buy any gold necklace or a piece of art and call it a retirement investment.
Gold IRA Rules
Well, actually, you can call it a retirement investment. You can call it anything you want.
You just can’t put that stuff in a tax advantaged IRA.
To do that, you need to follow the rules.
The rules are simple.
There is just one rule. Here it is.
Rule #1: You can only include certain gold products in an IRA.
Allowable products include:
- Gold bullion bars that are at least 99.5 percent pure and only if they were made by a COMEX, NYMEX or ISO 9000 certified refiner
- Gold bullion coins that are at least 99.99 percent pure
- Gold American Eagle coins
Disallowed products include:
- Rare or collectible coins or graded coins
- Any legal tender gold coins or bullion coins less than 99.99 percent pure (except American Eagles or American Buffalo Proof gold coins)
That’s not so hard.
Funding an IRA with investment grade gold is easy. It’s legal. It’s safe.
Best of all, you don’t have to worry about inflation eroding the value of your nest egg. Historically, gold more than holds its own against inflation.
So go ahead and buy gold for your IRA. It’s always better to have some hard assets in your portfolio.
You would be hard pressed to find a better choice than gold to protect your future.
And, while we’re on the subject of investing in gold, let’s touch on one of the most interesting parts of investing in gold. It’s enjoyable to learn about your gold.
It’s actually fun to learn about where your gold comes from. How did it get from its hiding place underground to your safe or depositary? Who is the artist who designed your collectible? How has gold changed the lives of the people who mine it, mint it, own it?
Learning about gold takes it from a lucrative but straightforward investment to something that goes beyond the numbers.
Don’t get me wrong. Gold’s numbers are great. But there’s a mystique about gold. Gold is special.
Sure, when you own stock in a company you can learn about it. You can read the annual report and attend shareholders’ meetings. You may even be able to tour a plant or visit the head office. Ho-hum.
Because no matter how much research you do, owning stock in a company never provides that visceral, personal connection that owning gold does.
Throughout history, people have lusted after gold. They’ve fought wars over gold. They’ve uprooted their families and put everything they own on the line to find it.
When was the last time you heard about someone walking 3,000 miles through rugged terrain to own a share of stock? Probably never.
But thousands of miners did just that during the California, New Mexico and Nevada gold rushes in the latter half of the 19th century. You can read more about that in our recent “After the Gold Rush” newsletter.
Right now, we’d like to help you build your portfolio with advice on ways to buy gold.
Talking the Gold Talk
We all feel the lure of gold, but we’re not all born understanding the lingo of gold investments. Even people with current positions in gold don’t always know what all the specialized terms mean.
So, whether you are new to gold or an old hand, I’m going to take a moment to explain a few of the terms you might hear, and tell you why you should care.
In this newsletter, we’re going to explain the different types of gold coins, bullion and collectibles. If you think you already know everything there is to know about gold, I challenge you to read on anyway. I bet you learn something new.
I’m going to tell you about specific coins that you might want to include in your portfolio. I’ll let you know which ones you might consider for your IRA and which one are just great to own as part of a balanced portfolio.
While I’m doing all that, I hope to help you build a stronger connection with your gold investment by telling you a little of the story behind the gold.
So, now-- let’s get down to the basics.
Gold bullion is pure gold, refined to investment grade. Investment grade, as we saw above, is at least 99.95 percent pure gold in the U.S. Other countries may have slightly different definitions.
There are other grades of bullion, such as “Crown Gold” which is alloyed with about 3 percent copper. The London market standard and the U.S. standard for bullion grades are the same. This standard dominates the commodities market.
Bullion is the form that jewelers and industrial buyers of gold usually buy. Bullion tracks more closely to the market price of gold than other forms of investment grade gold.
Fun Fact: The word bullion comes from the French word for “boiling”. It came from the act of smelting ores.
Bars or Ingots
Gold bars and gold ingots are forms of gold bullion.
Ingots are usually larger than bars. To make ingots, the producer pours molten gold into molds.
Standard ingots held by central banks are usually 400 troy ounces. This is known as the “Good Delivery” ingot.
The most common ingot for training is the Kilobar, which weighs 1000 grams.
To make bars, the producer usually stamps or mints them from sheets of gold. Bars sometimes include decorative or commemorative designs
To be investment grade, bars and ingots must be made under strict manufacturing conditions.
Fun Fact: The largest gold bar in the world weighs more than 550 pounds and is worth more than $10 million.
Collectibles take many forms, but for investment purposes the term most often refers to coins or bars minted primarily for investment or collecting.
You may also see jewelry or other objects touted as gold collectibles. You probably shouldn’t consider these as investment grade gold. Their value may not reflect the premium you paid when it’s time to liquidate.
Fun Fact: The most collected gold coin in the world is issued buy the Turkish mint. Turkey’s mint produced more than 211 million gold coins since 2000.
Grading refers to the process of appraising a coin’s value. Grading considers quality, rarity, investor interest and an investor’s ability to liquidate the investment.
There are several scales in use for grading coins. The preferred scale may vary depending on the country and the appraising body.
Fun Fact: There are two well known grading services in the U.S. They are the Professional Coin Grading Service (PCGS) and the Numismatic Guaranty Corporation.
A mint is a place where coins, medals or tokens are manufactured. Minting also refers to the process of minting coins and medals. Governments own some mints for the purpose of creating official currency. Some mints are privately owned and used to create collectibles.
Fun Fact: The U.S. Mint in Philadelphia is the largest mint in the world. All U.S. coins are made in this mint.
Uncirculated is the term for coins which have never been used as money. These coins may have a “face value” but they are usually created as collectibles rather than for use as currency. The term is also used for proof sets, which are samples or coins from the first test runs of a new coin.
Fun Fact: When the U.S. Mint creates coins to sell as uncirculated, it uses new dies, a special cleaning process and more force. This results in a coin with more definition and a more satiny finish than coins minted for circulation.
Proof coins are first run or sample coins created to check the dies and the production process. Due to the high interest in proof coins, many mints actually produce larger quantities of proof coins for sale to collectors.
Fun Fact: Proof coins are all handled individually by hand rather than commingled during production as standard coins are.
ISO 9000 is an international certification standard to ensure that manufacturing processes meet all statutory and regulatory requirements for quality. Independent auditors are responsible for issuing the certification. Once achieved, companies must undergo re-certification and re-auditing periodically.
Fun Fact: To be included in a gold IRA, coins must be manufactured in ISO 9000 certified plants.
An alloy is a combination of metals. Some alloys occur naturally. For example, rhodite, which is a mixture of gold and rhodium, occurs in nature.
Other alloys may be created to change the characteristics of gold. White gold is mixed with palladium, nickel or another white metal. Rose gold is gold and copper mixed to create the characteristic pinkish color.
Fun Fact: Carat is a measure of gold’s purity. Gold marked 24K is at least 99.99 percent pure gold. Gold labeled 10K is the least pure grade of gold that can be marked with the standard “K” symbol
So, was I right? Did you learn something new about investing in gold or the history of gold? Admit it. You didn’t know the origin of the word “bullion”, did you?
Well, maybe you did. But I hope that this little refresher gave you a good grounding in the terminology used in gold investing.
In upcoming newsletters, I’ll be looking at the history and stories behind some of the most common or intriguing gold investments. But those fascinating stories are for a future newsletter.