Is it worth investing in gold? Have you been duped about this precious metal or is it time for you to look into the fortunes that investing in this shiny metal may bring? In this article, we shall uncover the secrets behind the use and usefulness of gold in today’s economy. Read on to discover what lies in store for those who decide to invest in gold.
Have you protected your retirement investment portfolio from the fast-rising inflationary forces?
Gold in the U.S.A
On one hot afternoon, a man named James Marshall was preoccupied with building a sawmill for John A. Stutter. Exhausted, Mr. Marshall decided to take a break by leaning on a post he had just erected. As a tired laborer would do, he proceeded to wipe the sweat off his dusty brow. Something caught his attention in the process- a shimmer on the ground. An attractive shimmer for that matter!
It wasn’t long before he realized that he was in fact staring at gold. An attempt was made to cover up this discovery, but word got to a publicist in Francisco who immediately cranked up the rumor mill.
So the famous California Gold Rush begun- over 300,000 people equipped with the most efficient tools back them plowing through the field, in search of this precious metal, with the hope that it would change the course of their financial life. Unfortunately, only very few people succeeded in this mission.
That is, of course, just the modern tale about the discovery of gold. Prior to this, the Romans, Egyptians, and many other early civilizations had discovered gold and had used it for various purposes, including the creation of jewelry. In 1223 B.C., the Egyptians took things a notch higher by constructing the tomb of pharaoh Tutankhamun using Gold.
Around 700 B.C., the first gold coins were created, and this set gold on the path of being entwined with the concept of money. Lydian King Croesus enhanced the techniques used to refine gold around 564 B.C. and went on to create the first internationally recognized gold currency.
Gold then served as money for thousands of years until 1971, when the U.S.A abandoned the gold standard and adopted fiat currencies. Gold was since then used as an investment and is often perceived as a commodity. Even so, this shiny metal still behaves like a currency.
Gold’s correlation with other commodities is quite weak, and it is not tied to any particular country. As a global monetary asset, the prices of gold reflect the global sentiment. There are, however, some notable U.S. macroeconomic conditions that influence its price curve over time.
Reasons investors own gold today
In this section, we take a look at why some investors swear by gold. As we already know, gold has earned its respect in all corners of the world and has been interwoven into many cultures for thousands of years. Throughout these years, people have held gold for different reasons.
Generally, however, societies and economies have placed all placed value on gold, hence enabling its worth to remain intact (and to grow).
This has made it the metal that investors fall back on when other currencies are failing them, meaning that it offers insurance during economically challenging times.
Below are the top reasons why investors own gold, and why you might want to think about owning some gold now.
Gold is a store of value
Unlike all the paper currencies we have around, and most other assets, gold has managed to maintain its value over the years. Those looking for a way to pass on their wealth from one generation to the next one have taken to gold investments.
This has to do with the fact that the unique properties of this shiny precious metal are highly valued. Gold, for instance, does not corrode like some other metals, making it a suitable asset to hold for many decades. In addition to that, gold has a beautiful and outstanding color, which is appealing to every eye.
Gold is a hedge against inflation
Historically, gold has been a great hedge against inflation, owing to the fact that its prices tend to rise whenever there’s an increase in the cost of living. In the last 5 decades, investors have witnessed the prices of gold skyrocket as the stock market takes a nosedive, during the years in which there has been a high rate of inflation.
The simple explanation behind this phenomenon is that whenever fiat currencies lose their purchasing power to inflationary forces, gold which is usually priced in the same currency units tends to rise along with other commodities. In addition to that, gold is perceived as a store of value, hence people are usually motivated to purchase more gold upon realizing that their local fiat currency is losing value.
The diversification of their retirement investment portfolios
The old saying has it that you should not put all your eggs in one basket. It is the mark of a seasoned investor to know when and how to allocate funds to various assets in their investment portfolios.
The key to diversification, as investment experts have proven, is to select assets that are not closely correlated.
Gold has for a long time had a negative correlation to paper assets. Essentially, the poor performance of stocks, bonds, and mutual funds has always been accompanied by an increase in the prices of gold. During the years in which the prices of gold are not looking good, stocks prices are usually on the rise.
With the above knowledge in mind, investors have taken to allocating a small portion of their retirement investment funds to gold, to counteract the volatility of paper assets.
The U.S. dollar is weakening over time
The U.S. dollar is one of the most important reserve currencies in the world. This means that a lot of things in the economy go right or wrong depending on the movements of the dollar. Despite being a reserve currency, the U.S. dollar has been declining in value, a thing that has often prompted investors to flock to gold for the security that it offers (since it is a store of value), and this has led to a significant increase in the price of gold.
In the decade lasting between 1998 and 2008, for instance, the price of gold nearly tripled, hitting the $1000 milestone, before proceeding to double within the 4-year period lasting between 2008 and 2012 (right after the global recession).
This decline in the U.S. dollar has been attributed to a number of factors including:
- The U.S. had a very huge budget
- Trade deficits
- A sudden and large increase in the money supply.
Gold has been observed to retain its value not only during times of financial uncertainty but also during geopolitical uncertainty. This shiny metal has, due to this, earned itself the name “crisis commodity”, since people flee to it for safety whenever world tensions are on the rise- during such times, gold outperforms most investments.
Crises such as Brexit contributed to the major movements in the price of gold. Effectively speaking, the price of gold often goes up whenever the confidence in the government of the day is low.
In the present times, there are a lot of political unrests that are not only troubling our health, peace, and well-being but also the economy. Take a close look at the graph of the stock market prices, and you will see that the economy is not as stable as many people assume it is.
- Protection against deflation
Deflation refers to a period in which the prices of commodities decrease, businesses slow down, and the growth of the economy is impeded by excessive debt. The last time deflation happened was back in 1930, during the Great Depression. During this period, the purchasing power of gold increased significantly, while that of fiat currencies decreased sharply.
After the 2008 crisis, deflation occurred in some parts of the world, although it was only to a small degree. By this time, investors had managed to confirm their suspicions that hoarding gold during financial crises was a reasonable bet.
- Increased demand
The increase in wealth amongst those living in emerging market economies has created a window of opportunity for investors to make money. Most of the people living in these countries can now afford gold. In China, for instance, where gold bars are viewed as a form of saving, there has been a notable increase in the demand for gold.
India, the second-largest consumer of gold in the entire world, has been known for the use of gold in the manufacture of jewelry that is used in the wedding season that happens in October every year.
More individual investors are also purchasing gold, owing to the knowledge of the fact that this precious metal is a must-have, more so in these times of uncertainty at the economic and political level.
Why central banks are purchasing gold at a record high?
Central banks purchased gold at a significantly high rate in the first four months of 2021. During that period, about 150-200 tons of gold were purchased by this sector. Hungary and Thailand were the two main buyers of gold, with 63 tons and 43.5 tons respectively.
These happen to be the second and third largest purchases of gold by central banks in the last one and a half decades, eclipsed only by the 100-ton purchase made by Poland in 2019. Thing is, even before the 2020 pandemic, the global economy was already performing poorly, a thing which had forced central banks to get hold of as much gold as they could.
In the past decade, these financial institutions have been preoccupied with the purchase of new reserves and shipping them to their home countries for storage.
In 2019, central banks purchased about 650 tons of gold, which was 6 tons less than what they had added to their reserves in 2018. Surprisingly, before 2007 to 2009 financial crisis, central banks were net sellers of gold on a global scope.
In the period lasting between 2009 and 2020, China, Russia, Uzbekistan, Turkey, and Kazakhstan have been active buyers of gold. Large efforts have also been made by many central banks to repatriate their gold reserves from their offshore storage facilities located in New York and London.
What is the real reason behind the central banks purchasing gold in such large amounts?
So, why is all this happening? Countries are making their dash to gold due to geopolitics and economics. Gold generally symbolizes the strength of a country. Stocking up on gold has as such made a lot of sense in the populist climate. There are also those who have decided to invest in gold in a bid to diversify from dollars. The fact that the nations like China, Russia, China, and other Western European nations are trying to topple the U.S financial system by buying and repatriating gold, should be a clear indicator of the value placed upon this precious metal.
Think of the geopolitical tension as an Armageddon, and gold being the weapon that everyone needs to survive. The former Slovak Prime Minister, Robert Fico urged his parliament in 2019, to compel its central bank to repatriate its gold reserves in London. He argued that their overseas reserves could be at risk if a new global economic crisis erupted.
The thing about geopolitical tension is that it is not simply about countries threatening to go to war with each other. It is about countries making moves aimed to crush their opponents’ economies. Recently, Germany repatriated its bars from the USA and claimed that they all appeared different from what it perceived was in store.
This is despite the fact that the U.S. has well over 8000 tons of gold in its reserves, in comparison to Germany which has roughly 3500 tons. As an investor, you do not want to end up with fiat currency in your hands when your opponents come after you. You need to have a safe haven to run to, to ensure that your investment portfolio does not go up in smoke when a major global economic strikes.
Do you know what else central banks are doing beyond accumulating more gold? They are printing more money in an attempt to stimulate the global economy. Unfortunately, doing this also triggers other market forces such as inflation which have very adverse effects on paper assets. Gold continues to have its intrinsic value and offers countries the much-needed peace to get through periods of inflation and economic downturns.
Owning gold is a way to plugging yourself into the national and global strategy aimed at offering a safe haven to run to when push comes to shove, and when the global economy is plummeting.
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The 1933 Gold Confiscation – Will it happen again?
April 5, 1993, was quite an unusual day for gold owners in the USA. On this day, President Franklin D. Roosevelt issued the famous Order 6102, requiring all citizens to sell their gold to the U.S. government. Anyone who dared to resist was hit with a $10,000 fine ($205,000 today), along with a 10-year jail term. The hardworking investors were robbed of their wealth from this day.
Till today, there are people who shy away from gold investments because they believe that a repeat of the same can happen if the government becomes desperate enough. I honestly believe that these fears are not misplaced, owing to the current state of the government’s finances.
Would the government, however, do the 1933-style confiscation again? I think this would not be the case.
For starters, only a very small percentage of people in the U.S. own gold. A great proportion of the population does not even have an idea about what gold coins look like, or what they can do for them.
At the time of the 1933 gold confiscation, however, the U.S. was still relying on a variation of the gold standard. The gold standard was abolished during President Nixon’s tenure and was replaced by fiat currency. This is why the government wouldn’t probably bother confiscating gold.
Today, if the government is desperate to revive the economy through wealth confiscation, it would debase the currency by printing large amounts of money.
Gold owners would, however, still not be in the clear. The government would tax windfall profits on gold. This would enable the government to achieve the same objective as that of its 1933 gold heist.
What is a windfall profit anyway? It is what the politicians decide it is. It is a profit that they do not like. In 1970, for instance, domestic oil producers were hit with a 70% tax on windfall profits. As you can see, this type of tax is sanitized theft.
If gold prices exploded today, as they (most likely) will in the future, it would not be an awkward surprise if Congress passed an Act legalizing the taxation of about 80% of gold profits that investors accumulated through the sale of gold.
Here is how you can secure your investments from windfall taxes on profits
The solution to this problem would be the creation of a Roth IRA which is usually funded using after-tax savings. The future gains from the investments in a Roth IRA cannot be taxed, which is exactly what you need to sail past the taxes on windfall profits.
By the time the government is deciding to go after gold investors in this manner, I believe that things will have gotten out of hand. At such a time, those who only own paper assets will already have suffered the wrath of an unstable economy.
In October 1929, there was a nasty stock market crash that lead to the Great Depression, which contributed to the need for the government to confiscate gold. As you can see, paper asset owners were first in line to book massive losses, before the government descended upon gold owners. The fact that the decade-long economic depression led to the worldwide GDP dropping by about 15% should go a long way into proving just how out of hand things had gotten.
It is, therefore, a good idea to take cover under a gold IRA, to ensure that in the event of the collapse of the economy, that you do not lose your capital due to heavy taxation (windfall taxation).
Your freedom is under attack – can the government take your IRA/401(k)
Many people think that their IRAs are safe, but the truth is that for most Americans, they’re just as risky as other financial assets. Retirement accounts are at the risk of seizure by the federal government as well as the state tax authority. The jurisdictions relating to the safety of retirement plans may vary from one state to the other, so you should look up your state laws to be in the know.
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In most cases, however, you’ll find that federal laws protect ERISA (Employee Retirement Income Security Act) plan owners from existing state laws. ERISA plans include 401(k)s, Health Savings Accounts, Life Insurance plans, etc. Generally, plans that are sponsored by employers qualify for ERISA protection. Accounts that one starts on their own accord (most IRAs) are not subject to ERISA protections. Even so, the laws protecting ERISA plan owners are only cover civil procedures such as lawsuits. If the federal government, therefore, decides to come after you, you may not have any safe bet.
Unfortunately, the government does not have to be right to take any action against you and your investments. In fact, something as trivial as a handwritten return being read wrong to have the government coming after you. Depending on the level of scrutiny, your retirement assets could also be jeopardized and you could lose them altogether.
How then can you protect your retirement assets?
The first thing that comes to most people’s minds whenever the protection of assets is mentioned is an offshore IRA LLC. A general approach to promoting these schemes is that opening an offshore IRA LLC helps you stay clear of creditors, as well as the federal government.
What they don’t tell you is that the place you incorporate your LLC makes a big difference, in terms of what the IRS can access. There are numerous tax treaties that the USA government has formed with foreign nations, that enable the IRS to still seize the funds held in foreign nations.
And even if you decide to incorporate your IRA in a country that the US government does not have an agreement with, there is nothing preventing the USA from forming a new agreement with that country.
Moreover, if your intention is to move your funds to an offshore account with the plan of hiding them from the government, then you should know that the federal government will come after you at all costs. Unless you decide to leave the USA and never return, you can expect to be scrutinized by the US government pretty intensely.
This is why it only makes sense to protect your freedom to invest through time-tested assets such as gold. If you open a gold IRA today, you can rollover the existing retirement investment assets from your 401(k) to gold, without losing your ERISA protection. The rollover can happen tax-free, and just like is the case with traditional IRAs, taxation on the proceeds is usually deferred until you are ready to take distributions.
When it is time to take your distributions, you can decide whether you will have your distributions in cash, or in physical gold. This allows you to retain all the benefits of gold ownership, even after getting done with your tax-deferred investment. Also, since your investment is in physical gold, and not in the form of paper assets such as stocks and bonds that are held through traditional IRAs or 401(k) accounts, it is not very easy for the government to pounce on you, and freeze your gold assets.
I would generally advise that when it comes to keeping your retirement assets out of the IRS’ reach, that you do not get on the IRS’ bad side. You should, for instance:
- Pay all your taxes on time
- Dot all your i’s
- Cross all your t’s
Sometimes, however, even such precautionary measures do not always work in your favor. In such times, you will need all the help you can to ensure that your assets are safe from the government’s grabby arms.
Investing in gold can be one thing that keeps your investment portfolio safe. Besides the tax benefits that help you during the times in which the economy is stable, the ability to also have your assets protected during the times when the economy is taking a nose-dive is priceless. Opening a gold IRA and rolling over the funds and assets in your IRA or 401(k) is the only way to protect yourself from government confiscation, and from the negative market forces in an unstable economy.
Is it worth investing in gold? I hope you can easily give an answer to this question, after having taken your time to go through this article. The world is on so many levels chaotic, and it is simply a matter of time before things blow up. At the time of writing this article, the USA is already experiencing a record high inflation, which is expected to last for several months. What will you do about this situation, to ensure that your retirement investment portfolio is safe and that your freedom to invest is not taken away from you? Let me know in the comments section below.
I wish you well,
Eric, Investor and Team Member at Gold Retired!