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Putting Precious
Metals in Your IRA |
Overview
In 1997, gold bullion and silver bullion
were approved for IRAs. Previously, only Gold Eagles and Silver
Eagles were acceptable. This change was especially beneficial to
IRA investors who prefer silver.
One-thousand ounce and 100-oz 999 fine
silver bars sell near the spot price of silver, while Silver
Eagles carry premiums that easily can exceed $1.80 an ounce. The
1997 change means IRA investors now can get much more silver for
their IRA investments.
Another significant change was the inclusion
of American Platinum Eagles, the most popular platinum bullion
coins in the US. This change offers IRA investors the opportunity
to diversify their investments.
Gold Eagles
are the only gold coins specifically approved for IRAs. Other gold
coins, to be eligible as IRA investments, must be at least 995
fine (99.5% pure) and be legal tender coins. This provision puts Gold
Maple Leafs, Kangaroo Nuggets, Philharmonikers, and the Perth
Mint’s Lunar
Series on the approved list. Conversely, many gold coins, such as Krugerrands (91.67%
pure) and old US gold coins (90% pure), are not legal investments
for IRAs. (Click on links for more information on approved coins.)
Silver Eagles
are the only silver coins specifically approved for IRAs. The 999
fine clause makes Silver Maple Leafs also eligible. However, both
coins carry high premiums that could shrink in a rising market.
For IRA investors who prefer silver, CMI recommends bullion bars.
Pre-1965 US 90% silver coins are not eligible for IRAs.
American Church Trust
CMI recommends American Church Trust
(ACT) for investors who want IRAs that will accept precious
metals. Based in Houston, Texas, ACT was organized in 1983 to
handle church bonds. Today, ACT manages some 700 active bond
issues.
In 1990, ACT added self-directed IRAs and
has managed more than 13,000 accounts. Regulated by the Texas
Banking Commission, ACT has more than $200 million under
management.
CMI has worked with ACT for ten years and
always has found ACT personnel to be professional, courteous, and
helpful. Additionally, ACT-administered IRAs are economical.
Establishing an IRA with American Church
Trust
Setting up a self-directed IRA with ACT is
quite easy. First, call CMI at 1-800-528-1380 and request an IRA
packet, which will be mailed immediately. Afterwards, three simple
steps are involved:
1. Submitting completed paperwork
2. Funding the account
3. Directing CMI which precious metals to
buy
Step #1 involves completing the paperwork
and sending a check for $135 to ACT. The $135 takes care of
ACT’s first year’s annual fee ($35), the first year’s
storage ($60), and the initial transaction fee ($40.) After that,
ACT’s annual fee is only 1/8 of 1% of your IRA’s asset value,
with a minimum of $35 and a maximum of $150.
The metals are stored at HSBC Bank USA’s
New York precious metals depository, which is one of the world’s
largest and is used by COMEX and other major commodities
exchanges. (HSBC is one of the world’s largest banks with more
than 6,000 offices worldwide.) Annual storage fees are as follows:
$1.00/$1,000 assets of gold or platinum and $3.00/$1,000 in
silver, with a minimum of $60 and a maximum of $200. (See
"Financial Disclosure" on the IRA Fee Schedule, which
comes with the IRA packet.)
Step #2 involves completing the proper forms
to transfer the funds to ACT. Normally, the funds are transferred
directly from an existing IRA or Qualified Retirement Plan.
In Step #3, the IRA investor directs CMI
which precious metals to buy. After CMI delivers the metals to the
depository, ACT pays CMI, and the IRA investment is complete.
Investors wanting to discuss setting up an
IRA with ACT are encouraged to call CMI at 1-800-528-1380. If,
after getting your questions answered, you want to proceed, CMI
will mail to you an official ACT information packet, which
includes an application and other necessary forms.
FAQs
"Can I put gold and silver coins I
already own in my IRA?"
No, IRS regulations concerning IRAs prohibit
that.
"Can I hold the metals myself?"
No, IRS regulations require that the metals
be held by an approved depository. Even ACT cannot hold the
metals; consequently, ACT has arranged for HSBC Bank USA’s
precious metals depository to secure the metals.
"Why should I buy gold and
silver?"
First, for diversification, which is the
cornerstone of a solid investment portfolio. Until the mid-1990s,
when stocks started producing fabulous profits, most investment
advisors recommended balanced portfolios, with mixtures of stocks,
bonds, and precious metals.
Stocks provided the opportunity for growth;
bonds produced income, and precious metals protected against
inflation and financial chaos. But, as the stock market climbed
onward and upward, caution was thrown to the wind. Stocks came to
dominate most portfolios, pushing bonds to the back burner and
precious metals out of the picture. Now appears to be a prudent
time to return to a portfolio weighed heavily toward gold and
silver, as discussed below.
The second reason for buying gold and silver
is that their prices are inversely related to stock prices. That
is, when stock prices go up, metals prices go down. This has
certainly been the case over the last fifteen years. Likewise, the
charts show that when stock prices go down, metals prices tend to
rise.
The graphs also illustrate that
stocks and gold revert to their means, middle points between
extremes. During the 1990s, stocks went to extremes on the upside,
and gold went to extremes on the downside. Over the next few years,
both can be expected to correct, or revert to their means.
Therefore, investors should look for stock prices to fall and metals
prices to rise.
With stock action signaling that the
great bull market of the 1990s may be over, gold and silver could be
the next bull markets. Adjusted for inflation, gold and silver
prices are at record lows. Although most high tech and dot-com
stocks have suffered severe losses, many "old economy"
stocks still enjoy big gains. Now could be a most propitious time
for investors to switch from stocks to gold and silver, especially
in their IRAs.
"Should I buy gold coins or gold
stocks?"
Instead of gold or silver bullion, many investors opt for precious
metals mining stocks because they normally yield higher percentage
increases than gold and silver when metals prices rise. However,
investing in precious metals stocks carries risks beyond buying gold
or silver bullion.
The risks are many and varied, and sometimes
unforeseen problems can send stock prices plummeting, which, of
course, is true of all stocks. Management mistakes cause most
mishaps. With precious metals and other mining stocks, the sizes and
grades of ore deposits can be overestimated or the cost of
extracting the ore can be greater than expected, resulting in lower
profits or even losses.
Additionally, businesses always struggle with
economic downturns, interest rate increases, labor troubles,
governmental interventions, and environmental requirements.
Increases in energy costs--even energy shortages--could plague some
mining companies, notably those operating in Nevada’s famed Carlin
Trend.
For disastrous management decisions, Sunshine
Mining and Refining Company comes to mind. Once a favorite of silver
stock investors, Sunshine traded at $13 in early 1998 on the NYSE.
However, by 2000 Sunshine was in Chapter 11, and its stock has
traded at less than a nickel on the NASDAQ.
In 1996, Sunshine’s management borrowed $30
million and in 1997 an additional $15 million for development of its
West Chance ore body at the Sunshine Mine, after which the company
is named. Part of the borrowed funds were used to delineate what the
company calls a "world-class" ore body in Argentina.
Although management claims the West Chance
efforts were successful, management misjudged cash flow and was
unable to meet interest and principal payments on the $45 million.
Efforts to refinance were unsuccessful, and the lenders took control
of the company and mothballed the famed Sunshine Mine. Shareholders
wound up with about 3.6% of the company. Unfortunately, this was not
Sunshine’s only brush with disaster.
In 1972, a fire in the Sunshine Mine nearly
destroyed the company. While Sunshine’s stock price suffered, the
company managed to survive. Now, Sunshine Mining essentially has
been taken over by its creditors.
Ashanti Goldfields (Ghana) and Cambior
(Canada), two gold producers, also exemplify what can happen to
share prices when managements make bad decisions. In early 1996,
Ashanti (ASL) traded at $25; in 2000, Ashanti’s stock traded below
$1.50. In early 1996, Cambior, traded at $16; in late 2000,
Cambior’s stock traded at twenty-five cents.
Both companies got caught up in forward sales,
and their balance sheets were severely damaged by margin calls in
1999 when gold rallied from the $250s level to $338 on the
announcement that 15 European central banks would limit gold sales
and leasing for five years (The Washington Gold Agreement). Gold’s
price move caused Ashanti and Cambior to liquidate assets and/or
convert loans to equity shares at rates that severely damaged the
value of their stocks.
Forward selling remains a threat to other gold
mining companies because the amount sold short via forward sales is
disproportionate to the size of the gold market. Some estimates have
total forward sales equivalent to three to five years of production.
One or two small short positions could be unwound with only minor
price increases. But, the total position is enormous, and reversing
it without the price of gold skyrocketing will be difficult, if not
impossible.
Forward selling involves borrowing gold and
selling it, and it is done mostly by mining companies because,
logically, they should be able to replace the borrowed gold out of
future production. Forward selling is profitable because the
lenders, primarily central banks, lend with charges (lease rates) of
about 1%, sometimes even less. The borrowers sell the gold with
effective returns of somewhere between 6% and 10%, depending on the
borrower’s credit rating.
If the funds from the sales of the gold are
invested in high-grade bonds, the borrowers receive probably 6% to
8%, for a tidy margin of 5% to 7%. However, if the borrowers use the
funds in operations, thereby permitting them to forego borrowing in
the credit markets, then they effectively receive higher rates,
depending on the companies’ credit ratings.
Hundreds of millions of dollars are made via
forwarding selling. The central banks earn fees on an otherwise
"sterile" asset. The mining companies earn 5% to 9%, and
the bullion houses that arrange the central bank loans and handle
the gold sales earn huge fees. Forward selling pays off like a
broken slot machine--except for gold mining companies’
shareholders. Shareholders lose because forward selling distorts
gold’s supply/demand fundamentals and puts downward pressure on
the price of gold. However, forward selling is not without its
risks.
If the price of gold rises, the lenders want
additional margin deposits, which is what hammered Ashanti and
Cambior. (Despite the borrowers having millions of ounces of gold in
the ground, the central banks require "margin deposits,"
usually US treasuries. This works much the same way as margin
deposits do on futures and stock exchanges.) It is believed that
some bullion houses have even given the central banks guarantees
that the borrowed gold will be replaced. If so, then adverse
developments in the forward sales arena could force government
bailouts, such as was the case with the Fed-engineered rescue of
Long-Term Credit Management.
Precious metals stocks are a way to
participate in the gold and silver market; however, compared to gold
and silver bullion, stocks are risky. No one ever went broke holding
gold or silver. The same cannot be said of paper assets.
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