How Golden is Your Retirement Plan?

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As gold reaches $1000 per ounce and silver pushes its pre-bubble highs, investors have an increasingly vested interest in precious metals.  Once ignored for their below-average returns, metals and retirement portfolios are becoming a tried-and-true mix.

Why Buy Metals?

Of all the “speculative” investments, gold and silver are some of the least volatile.  The term “speculative” is often granted to investments that do not themselves produce.  Your gold holdings won’t grow more gold, nor will your physical silver coins ever pay dividends.  Thus, precious metals earn the classification of “speculative,” which many people assume to be naturally risky.  Gold and silver are said to have “intrinsic value,” or worth that is natural.  As is often repeated, gold and silver have never been worth nothing, and they tend to fluctuate in price to correspond with changes in the money supply or with fear.

Inflation and Deflation Help Metals

Throughout the financial crisis, pundits fearing deflation were still recommending gold.  Why?  Gold is a safe haven investment, and despite being heavy and hard to trade, gold will always have value as a store of wealth.  Investors fearing an economic apocalypse stocked up on gold, thinking that even if the value of the dollar and the markets crashed, gold would retain its worth, thus protecting them from any economic collapse.  As the US government worked to bail out Wall Street, investor sentiment again changed, turning bearish to reflect a fear of inflation after trillions of dollars in bailouts and a new stimulus packaged had been pumped into the economy.

Over the long term, gold is more responsive to inflation as an increase in money supply, but a flat supply of gold should only mean higher prices.  In the short term, gold is incredibly attractive to investors who fear a cataclysmic collapse, as the precious metal has survived for centuries as a store of wealth and retains its intrinsic value.

Why Retirement Gold Makes Sense

You do not have to be a doomsdayer nor a perma-bull for inflation to find value in gold as a store of wealth for your portfolio.  Ultimately, the goal of any retirement account is not only to grow your wealth, but similarly protect it.  Financial planners often criticize investors for investing too little and sometimes too much, as it is in the best interest of savers to maintain the same standard of living throughout your lifestyle.  Gold helps preserve a future lifestyle, even if in the next 30-40 years equity prices fall off a cliff.  If you have 10% of your portfolio in gold, you’ll always have at least 10% of your funds, no matter how well or poorly your other holdings perform.

How Much Gold is Enough?

Defining the amount of precious metals that should be used in a retirement account is difficult, as we all have different objectives, timeframes and spending habits.  However, the biggest disparity in how much you should invest in precious metals is generated by the way you decide to invest in metals.

For instance, you could buy gold or silver at 30:1 on the spot metals market, but with a 3% investment, you’d have nearly half of your retirement invested in the fate of metals.  You could buy metal mining companies with the same 3%, but then you’d be leveraged again, as small changes in the price of metals would ultimately affect the miner greatly.

Last but not least, you have physical metals that you can hold in your hand.  Physical metals are great, but they need to be stored and protected, and they provide a return equal only to inflation.

Your Best Gold Bet

The best way to hold metals is by purchasing gold or silver mining stocks.  The benefit of miners is that you do not have to store the metals; your positions will rise or fall faster than the change in inflation, and these companies tend to pay hefty dividends when not on the market for new mineral rights.  Investors should consider a small, but respectable, investment of 5% of their total retirement account.  This amount would fit perfectly in line of “cash” which almost all portfolios, mutual funds, and pensions hold as a safeguard to a reversal.  Holding miners will also allow you some leverage on the returns of gold or silver, and this strategy will be akin to holding 10-15% of your retirement account in precious metals without using too much equity to have a safe haven shield.

Maintain the Same Long Term Buying

Investors should opt to slowly buy into gold and silver, never minding the various peaks and troughs along the way.  Luckily for investors, the tailwinds of inflation are behind any investment in commodities; after all, only during a few years in the 20th century was the US dollar temporarily deflated.

Averaging in today’s peak prices, buying metals still make sense, especially considering precious metals have done nothing but appreciate in value with inflation.  To the long term investor, there is no reason to try to time the market with these types of investments.  Instead, rely on what works: buying in on the long haul and protecting your assets against inflation and economic uncertainty.