Commentary: Paul Ebeling on Wall Street


Special Report: Gold, How To…

With gold prices up about 20% YTD signs of a global growth slowdown and geopolitical tensions, precious metals are getting a close look from investors seeking insurance for their individual retirement accounts.

That is real, physical gold and silver coins or bars, not the precious-metals ETF’s or mining-company shares.

Physical precious-metals IRAs are not just for gold bugs. These can be a suitable investment for people with a long-term horizon who can benefit from precious metals’ role as a store of value and an inflation hedge.

Certain precious metals like gold, silver, platinum, and palladium have the Internal Revenue Service’s blessing to fund self-directed IRAs.

Opening a precious-metal IRA is not as simple. The IRS has strict rules to do it right; otherwise, savers may suffer taxes and penalties.

Precious metals normally are considered collectibles and not allowed in IRAs, but the Taxpayer Relief Act of 1997 allowed certain gold, silver, platinum, and palladium coins and bars into self-directed IRAs if they met a fineness requirement: 99.5% for gold, which is 24 karats, 99.9% for silver and 99.95% for platinum and palladium.

American Eagle bullion coins are the most popular IRA choice. The IRS also allows bullion coins from certain sovereign mints like the Canadian Maple Leaf and the Austrian Philharmonic, and some others.

To open a precious-metals IRA people use custodial firms specializing in these vehicles because they are familiar with the IRS compliance guidelines. These self-directed IRAs must be held in what is called an “arm’s-length” account under the control of a custodian.

And, in addition to fineness requirements, IRS guidelines say physical possession of the metals must be with a bank, credit union, or trust company.

In Y 1997, Congress allowed the following bullion precious metals to be saved in an IRA:

  • • American Eagle coins (available in 1 ounce, half ounce, quarter ounce and one-tenth ounce)
  • • American Buffalo bullion coins
  • • Australian Kangaroo/Nugget bullion coins
  • • British Britannia (.9999+ fineness) bullion coins
  • • Canadian Maple Leaf bullion coins
  • • Bars or rounds produced by an accredited refiner, manufacturer or national government mint that meet the minimum fineness requirements

Precious-metals IRAs are like any other qualified retirement account. Savers can roll over money from another qualified plan or they can transfer cash to fund the account; but they cannot put in any bullion they currently own or get from friends or family, as that violates IRS rules about self-dealing.

Once the IRA is opened/funded, the saver needs to contact a precious-metals dealer to select their bullion. The IRA owner directs the custodian to send the money to the dealer. Once the transaction is complete, the bullion needs to be stored. IRA custodians typically partner with 3rd parties since most d not have their own vaults. The IRA owner chooses a vault and directs the precious-metals dealer to ship the metal.

The IRA owner must receive 1st hand confirmation of all 3 steps, which is necessary for IRS record-keeping.

When looking for a precious-metals dealer, savers can use a coin shop or an online purveyor.

While a physical precious-metals IRA can be more costly to maintain than buying a physical-metal backed ETF, savers who choose physical IRAs want the peace of mind that comes with actually owning metal.

An ETF gives its owner exposure to the metal’s price movements, but with a few exceptions most precious-metals ETFs are cash-settled, so the owner never receives any metal when selling the ETF.

By putting physical metal in an IRA, the saver can always tap that asset in a worst-case economic scenario and have metal returned to him or her.

The premium to buy bullion bars is slightly lower than coins because minting coins takes a few extra steps.

Premiums will fluctuate with demand, but generally for 1-oz gold bullion bars expect to pay about 2% over gold’s spot price.

Premiums on 1-oz American Eagle gold coins are usually 3% to 3.5%.

For record-keeping and maintaining the account, IRA owners can expect to pay about $100 to $150 annually to the custodian.

The cheapest storage option in a domestic vault ranges from $100 to $200 annually for allocated storage, where metal of the same type is commingled. People who want the exact bars or coins they put into storage can opt for segregated storage called “bar-in, bar-out.” That usually costs anywhere from 0.50% to 0.75% of the value of metal stored, annually.

Just as equity or bond owners can change their IRA’s asset allocation, so can precious-metals owners. They must work with the IRA custodian and precious-metals dealer when buying or selling to stay within IRS rules.

When taking distributions there are 2 approaches: In one, the custodian sends the IRA owner the metal, who then has to settle up any tax payments with the IRS. In the other, if the owner wants to liquidate the metal into cash before taking a distribution, some custodians will withhold the necessary IRS taxes and send the owner the cash.

Precious-metals owners often like to keep their metal in a home safe, especially if they view metal as an insurance policy for crisis times, that is fine for regular metal ownership, but not for IRAs, the IRS has jurisdiction over the assets.

Note: If you invest in a piece of gold and it is not stored in the custodian’s possession, it is a collectible, a private transaction.

The Fundamentals and Technicals of Gold and Silver now.

Gold: The precious Yellow metal suffered its biggest daily loss in nearly 3 years last Thursday, shedding over $40 due to the risk-on mood and positive data from the United States. While Gold is positioned for more punishment in the near term, the Southside will be capped by global growth concerns and low interest rates across the globe. Where it ended last week and performs in the weeks ahead will be influenced by the US jobs report released Friday. The strong US jobs report should cool US rate cut expectations consequently strengthening USD leading to weaker gold prices.

The technical picture: Gold is under pressure on the dailies. Sustained weakness below $1525 should encourage a decline towards $1500 near term.

Silver: The Devil’s Metal Bears were in charge last Thursday and drove Silver lower in the morning as risk appetite made a return. The price action seen in Silver confirms its correlation with Gold prices. Further losses will likely be on the cards in the near term if Gold continues to depreciate as investors shun safe-haven assets.

The technical picture: Silver is under pressure on the dailies with Sep 19 prices trading around $18.23 now. The momentum could take futures prices towards $19.00 near term, the breakdown below this level invites more Southside action.

We follow gold and silver daily, the data may be helpful when making buying and selling decisions.

Remember, it is your money, so your responsibility.

Have a terrific week.