Plus: Gold ETFs to Avoid.
Per a Field Notes reader, slightly edited:
I want to invest in gold… but I only have pre-tax IRA dollars to invest in gold/silver bullion or in gold ETFs.
I’m about to lose my mind with these gold IRA companies. They all operate on the same MO: High pressure sales, try to divert to premium gold, and if you’re even slightly educated about what you’re asking, they answer with only scripted sales replies! I don’t understand the used-car-salesman approach for this type of product.
Is there really a preferred advantage to owning physical gold over ETFs?
This reader is so correct about the tactics too many gold IRA companies use. It’s like dealing with the offspring of a Nigerian prince who has $42 kajillion in a secret account and, of all the people in the world, he needs you to help him launder it out of West Africa, if you’ll only just send him $1,000 to pay the necessary bribes.
Now, on to the reader’s question… And of course: This should in no way be considered personal investment advice. Only you—and your financial advisor—know your personal situation.
But I can talk about HOW one can invest in gold with pre-tax dollars—and how it applies to both physical gold and ETFs…
You have numerous ways to own exposure to gold in pre-tax accounts. And to clarify for those not up on their Wall Street lingo: pre-tax accounts are 401(k), 403(b), personal pension, and IRA accounts. Basically, retirement accounts you fund with dollars from your paycheck before your paycheck is taxed (so that Uncle Sam can afford his next debt payment).
The options you have will reflect the type of account you’re funding.
So, if you’re in a 401(k), then you will initially be limited to whatever selection of mutual funds your company has chosen to offer through the plan administrator. Sometimes there’s a gold fund in there… often not.
But most 401(k) plans these days offer something called a “brokerage window,” which will allow you to basically run your money through what looks and functions just like a traditional brokerage account, in which you will have access to pretty much all of Wall Street—stocks, bonds, mutual funds, ETFs, etc.
Now, hold that thought for a moment.
Unlike a 401(k), most IRAs offer broad access to all kinds of investments, all the ones I mentioned above plus certificates of deposit and the like.
You also have the option to fund a self-directed IRA, in which you can expand your list of potential investments to real estate, private equity, crypto, precious metals, private debt and so on.
Through a 401(k) brokerage window and any IRA, you can buy gold ETFs, either those that own mining stocks or those that simply own and track the price of gold bullion.
If you go that route, then I would tell you to focus primarily on gold ETFs that own and hold their bullion in a vault and do nothing with it more exciting than watch it collect dust and audit it regularly. Some ETFs are using custodians that in turn are relying on sub-custodians, and those relationships are not always contractual.
If the gold market were to melt up, some sub-custodial links could break for reasons I won’t bore you with… and those who hold that ETF will find out that they don’t have a claim on physical gold but on a piece of paper that may or may not be worth the value of the gold exposure they think they own.
Years ago, in the first issue of my Global Intelligence Letter[BM1] , I recommended readers own Sprott Physical Gold Trust (symbol: PHYS). Those who heeded the advice have so far collected a 73% return, so I don’t think they will mind me sharing the recommendation here.
If you want to add just a hint of risk/leverage to your gold holdings, then I would suggest a small taste of the iShares MSCI Global Gold Miners ETF (symbol: RING). It owns a bunch of large and mid-tier gold miners. It’s riskier than an ETF, but it will add just a pop of return and a bit of income from a small dividend (that you could reinvest in gold, if you wanted). RING is also up about 75% since I first recommended it to Global Intel readers.
Note, though, that I would put no more than about 5% into this ETF, maybe 10% if you’re feeling frisky, because these are all miners and the mining industry moves differently than physical gold.
Now, if you really want just physical gold, then you need to move your cash into a self-directed IRA and then buy gold bullion coins through a provider such as APMex.com.
The process is this:
- You need a custodial account at a company that provides self-directed IRAs allowing you to hold gold. (The ones I regularly mention are GoldStar Trust, iTrust, Preferred Trust, Equity Trust, and some others.)
- Fund the account.
- Create an account at an online precious metals dealer that works with self-directed IRAs. There are several reputable ones, including APMex.com and JMBullion.com.
- Place an order with the metals dealer with the funds coming out of your self-directed IRA that the custodian holds (you might need to tell the custodian what’s going on, but they’re set up for this).
The gold you buy will end up at the custodian, held in your name in an IRS-approved, secure depository.
The reason for this is that you are never allowed to take possession of your gold held inside a self-directed IRA. IRS rules do not allow for that. So you need to hold it with a custodian that offers an approved depository, which the custodians I mentioned do.
One other note: The IRS only allows certain types of physical gold to be held inside an IRA. If you stick to US Gold Eagles, Canadian Gold Maple Leafs, Austrian Gold Philharmonics, South Africa Krugerrands, and British Britannias, you’ll be golden, forgive the pun.
And… That’s how anyone can own gold using pre-tax dollars.
