Tarnished: Why We Don’t Think Gold IRAs Are Golden

As gold keeps flirting with record highs, it continues attracting heaps of attention. We find it a little weird, considering this simply means gold is flat and trailing stocks since its last peak in August 2020, but you wouldn’t know that from the nonstop marketing campaigns. One in particular is gaining a lot of momentum: the push for gold IRAs. An article in Monday’s edition of The Wall Street Journal noted some considerations for those considering this and highlighted the difficulties in doing due diligence on the providers, given a lack of required disclosure.^[i] But we think there is more. Now, we have written before—and no doubt will again—that we don’t think gold’s combination of high volatility and low returns is a fit for most long-term investors’ goals. But if you disagree and want to own some anyway, in our view, a gold IRA is the suboptimal way to do it.

When IRAs were born as part of the Employee Retirement Income Security Act (ERISA) in 1974, they couldn’t hold precious metals. That changed in 1997, when Congress altered the rules to let some self-directed IRAs hold physical gold (or other precious metals), provided they were stored in an IRS-approved depository and the coins or gold bars were classified as investments rather than collectibles. That turned out to be a complex system for most folks to navigate, with high compliance and storage costs. But where there is demand there are business opportunities, and one-stop shops specializing in “gold IRAs” have proliferated over the past 15 years. They will generally set up the account, sell and store the gold for customers, streamlining the process. With gold now back near record highs and people (wrongly, in our view) touting it as an inflation or uncertainty hedge, gold IRAs are getting a lot of attention right now.

But look into this space closely, and you will find fees. A lot of them. When you own stocks and bonds in an IRA, if your account is self-directed, it is entirely possible your commissions will be free or close to it, depending on where your account is custodied. If you work with an investment adviser, they may charge a fee based on your assets under management. (Of course, brokers can charge an array of different fees that are transaction-based, so we recommend understanding those up front.) But Gold IRAs? They have a litany of what we would call operational or maintenance fees. There are account setup fees, which based on our Internet research of the major players, can run hundreds of dollars. Ditto the recurring annual service and storage fees.

And that is just the operational stuff: You will likely also pay through the nose for the gold itself. No, not because gold currently trades for over $2,000 per troy ounce. Because the gold IRA company—which also sells the gold—sets pricing, normally including a markup and, possibly, charges commissions to buy and sell it.^[ii] The pricing is a point these companies compete on, but oddly, few actually disclose the markups clearly. We reviewed several well-publicized gold IRA firms’ account agreements and found some disclosing they mark gold prices up by 10%. (The same document shows it could be much higher on specialized products or other metals.) Another quoted a range of 2% to 7%, but stated that premium coins could carry a markup of 35%. A third firm quoted a range of 4% to 33%, which is, well, wide.

So, using the 10% markup for simplicity, if you spend $50,000 on physical gold, you are buying $45,454.55 worth of gold. $4,545.45 goes to the gold IRA firm. That is light years beyond the commissions and dealer’s markup on an identically sized investment in stocks or liquid US Treasury bonds. Echoing the Journal’s claim, because disclosure requirements are so thin, most providers that we looked into didn’t disclose their markup, making it impossible for customers to know how much they are paying. And, by extension, making it impossible to know how much gold would need to appreciate for their actual investment to be profitable.

We also see some broader, investment-related drawbacks. An IRA is a tax shelter, enabling your investments to grow without being subject to capital gains or investment income taxes. That means dividends and bond interest are tax-free (though traditional IRA withdrawals are subject to ordinary income taxes). Gold doesn’t pay dividends or interest. It doesn’t generate earnings. It just sits there, in a vault, with its price often languishing between booms. This reality doesn’t quite square with the emotional marketing pitches we often encounter, which play on people’s real fears about currency collapse and the alleged importance of hard assets in some dystopian future. But in that event, what good is physical gold held through intermediaries and requiring mountains of paperwork to access?

That is perhaps the most perplexing part of this. Gold IRAs are often pitched as a hedge against a house-of-cards financial system, yet they require a great deal of trust and paperwork. Much more so than, say, owning a gold ETF that doesn’t require a special IRA, high fees or being responsible for physical storage. Again, we don’t think investing in gold makes sense for most folks, but if you are to do so, wouldn’t it make more sense to go with the most liquid, lowest-cost and lowest-hassle option? That is doubly true when you consider that gold’s long-term annualized returns are lower than long-term Treasurys. Anything that erodes an already low return seems like a suboptimal way to invest in an asset.

So please, if you find yourself tempted by gold IRAs, do your homework. Find the pros and cons. Grill the salesperson about markup and the entire range of costs. And then think critically about your reason for wanting to buy and whether this will actually accomplish what you are looking for.