Holding gold in a Self-Directed IRA account isn’t the traditional path by any means. For most Americans, the idea of having enough in retirement comes solely through the stock market or the bond market: continuously contributing to accounts that will grow over the long-term. Gold provides an interesting counterpoint to a portfolio, reducing overall risk and granting some additional peace and security to the feeling that you’ve properly diversified. But why should investors own gold in a Self-Directed IRA anyway? Let’s look for some answers.
Thinking about Gold Differently
“Money is gold, and nothing else.”
-Financier J.P. Morgan
When personal finance gurus talk about gold, it’s usually in all the wrong terms. They think about gold as if it were a stock that one should own. They point to the long-term returns on gold and compare it to the S&P 500. But many investments compared to the S&P 500 don’t stack up.
The key with understanding gold is that it’s not quite an “investment” in this traditional way of looking at investments. As J.P. Morgan noted, gold can be considered like money in its purest form. Gold isn’t the stock market, it’s not a bond, and it’s not a piece of real estate. Its job isn’t to generate dividends. Its job is to act like a strong form of money—a type of money that will hold on to its value.
These days, thinking of gold as money might seem outdated. After all, in the U.S., dollars are legal tender. You can’t very well pay for a gallon of gas by handing a few bits of gold to the cashier.
Instead, gold will serve as a hedge. In times of economic crisis, gold still holds on to its value. When the stock market is volatile, gold will still hold on to its value. If the strength of the U.S. dollar erodes, it will cost more dollars to buy an ounce of gold. For that reason, many experts look at gold as a central way of measuring economic strength. It can be the same in a retirement portfolio.
Reducing Risk with Gold
Owning gold in a Self-Directed IRA means that the gold you have won’t earn money the way renting out a piece of real estate would. However, gold does serve many of the same purposes as owning real estate does. As a hedge against inflation, gold helps you prevent the erosion of your assets whenever consumer prices take off. While the cost of a gallon of milk might increase in dollar terms, it’s going to be difficult to see the same price increase in terms of gold.
Owning gold in a retirement portfolio requires a long-term outlook. Buying and selling gold to take advantage of short-term swings in the gold market can be a risky business for most casual investors. But keeping a portion of one’s holdings in gold have the added benefit of reducing overall risk. If the stock market tanks one day, you may often find that the price of gold is unaffected—or even goes up. This reduction of risk helps to keep investors level-headed about where their overall portfolio is pointing.
A well-diversified portfolio that includes gold can add a lot of security to a retirement account. It can diversify your asset classes, ensuring that you don’t rely on any one particular market to get returns. And in the long-term, it may have a brighter future than some personal finance experts would make it seem.