Featured Article – Gold for your Golden Years

Published on July 7, 2011

It has been estimated that perhaps as many as four million “baby boomers” per annum will retire over the next two decades. The seventy-six million babies born between 1945 and 1964 constitute the coming formidable “silver wave” of future retirees. Unfortunately, to many individuals who do not prudently diversify their holdings well in advance of retiring, such a wave could end up feeling more like a financial tsunami.

Let’s face it; our financial priorities change as we reach middle age and prepare for the next chapter in our lives. Prudent individuals tend to regularly set aside funds into tax-deferred instruments such as IRA accounts, but, normally, not much thought is given to hedging against possible declines in the value of conventional assets such as stocks, bonds, or cash. It is erroneous to assume that the value of our retirement account will remain stable and be able to cover all future living expenditures.

One of the best-kept secrets of a successful retirement plan is the significant advantage presented by the rather simple strategy of diversification of one’s retirement funds. The more one can hedge against the effects of a possible decline in the purchasing power of an entirely US dollar-based portfolio, the higher the probability that hard-earned retirement assets will be preserved mostly intact for the long-run.

The US Dollar’s loss of purchasing power parity due to the effects of inflation has been a feature of US economic reality ever since the time of the Great Depression. Economic growth without inflation has been a noble policy goal. However, the methods used to achieve such growth have stimulated demand through the creation of large deficits and has resulted in sizeable increases in the money supply.

As a consequence, the Dollar’s purchasing power has declined throughout the years, and continues to do so. Have your IRA portfolio assets kept up with this insidious process of wealth erosion through inflation? This is why it is essential that a portion of your retirement nest egg should be placed into assets that are relatively immune from the negative consequences of a falling Dollar.

There exist a wide variety of precious metals, foreign currency, and real estate products that your retirement portfolio may contain. Such assets have historically offered a greater degree of diversification (in terms of asset classes and geography) and capital preservation potential than is normally available by investing only in ordinary, dollar-based assets such as stocks and bonds.

Gold, for example, has functioned as true money for nearly six millennia. Since the dawn of time, only about 145,000 tons of gold have been brought to the light of day. That figure, while seemingly quite large, represents a golden cube of less than twenty cubic meters! The remaining supply of gold available to mankind is a little less than half as much, or about 50,000 tons.

Gold is a finite physical asset that is accumulated, rather than consumed. As a result, virtually all the gold that has ever been mined still exists today in one form or another. Gold is simultaneously thought of as a commodity and as a monetary asset. Most commodities are consumed, or otherwise irretrievably lost. Gold, however, is accumulated –obviously, its main attraction appears to be that of a store of value.

Since gold cannot be printed at will, it preserves wealth better than most paper assets. Gold generally moves in the opposite direction of declining equities or paper currencies. Studies show that incorporating gold into a ‘normal’ mix of retirement assets tends to reduce the level of overall risk, may enhance overall performance, certainly adds an enhanced degree of liquidity, and it efficiently diversifies the portfolio.

Think of gold in your retirement account in the same way you think about owning a home or life insurance policy. It is a simple, yet effective means of buying peace of mind for the future. This is why gold for your golden years makes sense.

To be sure, all forms of investment carry some inherent degree of risk. Holding gold directly or in a retirement account also has risks (such as price risk, and opportunity costs due to gold’s ‘sterile’ nature; i.e., it pays no interest or dividends). Gold’s ability to serve as a portfolio diversifier is due to its historically low-to-negative correlation with stocks and bonds. The economic forces that determine the price of gold are different from the forces that determine the prices of most conventional financial assets.
Moreover, gold does not depend on a promise to pay on the part of any government or corporation, as is the case with investments in money market instruments, corporate and government bond markets and equities. Gold is not directly affected by the economic policies of any individual country and cannot be repudiated, as is the case with paper assets. In other words, gold is liability-free and is pure asset in the true sense of the word.

Gold, silver, and platinum are all essential commodities and they embody the characteristics of money but not the risk of being printed on demand. Gold has recently risen strongly. Increased global investment demand has demonstrated that gold is here to remain as a mainstay asset. Without it, an investment portfolio cannot be considered as reasonably diversified, or adequately insured. As the quest for capital preservation replaces the pursuit of perpetual gains so prevalent in the go-go 80’s and 90’s, the mania for paper assets is giving way to a renewed “golden era.”

Asset allocation, – an invaluable strategy for long-term investors- was indeed the “odd-man out” in the huge stock and real estate run-ups of the 1990’s. Despite many new groundbreaking studies showing the critical role asset allocation plays in investors’ portfolio returns, it became painfully clear that too many investors got caught up in the equity boom and that they were over-allocated to equity investments, in particular, telecom, .com, biotechnology and high-tech, and they paid a heavy price when equity returns and then real estate markets soured.
Each asset class has its own market cycle, so it is important to have different asset classes that are countercyclical to each other in order to have a portfolio that is ‘balanced’ and has a low volatility What investors need today are more genuinely “counter cyclical” or low-correlated asset classes they can add to their portfolios to receive the benefits asset allocation offers
As an individual asset, gold and gold-related stocks can be volatile. On the other hand, gold’s return characteristics clearly reflect a “safe harbor” aspect in bear markets. Of course, the ultimate measure of gold’s usefulness is in its return correlation to other asset classes. When held up to many other asset classes, including domestic equities, gold shows excellent low correlation and hence is an ideal asset for use in a diversified portfolio.
In order to start investing in these promising asset classes, it will first be necessary to open or to transfer an open IRA account to a specialized U.S.-based trustee who will help you administer your investments. These are firms that are able to deal specifically with the administration of these types of assets in a professional manner.

DISCLAIMER: Next Generation Trust Services, LLC does not endorse any products, services or investments that may be involved in this article, and this has been posted solely in an educational manner. Readers are encouraged to do their own due diligence regarding any investments or companies mentioned in this article.