Gold!

Plus, should you hold bitcoin in your IRA?

Ric Edelman: It's Thursday, December 19th. Got a question from Pepe. He's in Portland, Oregon.

Pepe: Investing in bitcoin is riskier than stocks. So, should I hold it in my taxable account or my IRA?

Ric Edelman: Well, Pepe, this is a great question, but it isn't a bitcoin specific question. This is a question that is faced by every investor. Should you own whatever it is you're going to own in your taxable account or in your IRA account?

Some folks don't have a choice. The only investments they have are tax-deferred investments, such as your 401(k) at work or your 403(b) or thrift savings account or what have you, or your IRA. But for those of us who do have assets in both places, you do have a choice. Should you put that given investment inside your IRA or inside your taxable account? Bitcoin, you're right. It's a riskier asset, but that's not really the point here. The real point here is that bitcoin doesn't pay dividends or interest. Meaning bitcoin is kind of like a growth stock. They don't pay dividends or interest either. So you could argue therefore that a growth stock or a crypto investment, any investment, it could be raw land, could be baseball cards or comic books or rare stamps or artwork.

Any investment that doesn't pay income, doesn't distribute dividends or interest is itself a tax-deferred investment, right? Because you don't pay taxes on the profits. It means as the asset rises in value, you don't pay taxes on that appreciation until you sell the asset. If you don't sell the asset for 30 years, you're not paying taxes for 30 years.

So why put a growth stock that pays no dividends into an IRA to get the tax deferral when that asset is already tax-deferred? On the other hand, bonds that pay interest or bank CDs that pay interest or stocks that pay dividends or real estate that generates rental income and assets that generate cash flows, which are ordinarily taxable each year, those kinds of assets make perfect sense for an IRA because the IRA shelters that income from annual taxation.

So, it would seem on that simple example, which asset belongs inside of a tax deferred account and which asset does not. There's more to the story though. And that pertains in fact, to risk, which you did reflect when you mentioned that bitcoin is riskier than stocks.

First of all, I could argue, is that always true? It might be riskier than some stocks. I'm not sure it's riskier than every stock, but I digress. The point is this, if you own an asset inside of an IRA and that asset loses money, you can't deduct the loss. So, if you do have an asset that you are expecting might lose money, I mean, not what you're hoping, not what you're expecting. If you really were expecting it, you wouldn't be buying it, right? Let's face it.

But if you thought it had the potential to lose money, then you don't want to own it inside of an IRA because in a taxable account, you can sell it and deduct the loss or use the loss to offset gains in other investments. You lose that ability inside of an IRA. So that's another reason to keep bitcoin and stocks outside of an IRA.

So you want to take a look at it from those perspectives. but I'll, I'll give you a wrinkle to all of this and that pertains to the Roth IRA. Remember the difference between a traditional IRA. also called a deductible IRA. The key is that when you do withdraw money from the account, it's ordinary income, 100% of the money you withdraw. But in the Roth IRA, those withdrawals are completely tax free.

So, here's an argument for putting bitcoin or those growth stocks inside a Roth IRA. In a taxable account, you're going to eventually pay the capital gains tax. In a Roth account, under current tax law, which Congress may change in the future, under current tax law, the distributions from the Roth are tax free, which means you could own your bitcoin and never pay taxes on its profits if you make withdrawals from the Roth.

So, it's complicated, isn't it? Should you use a taxable account versus an IRA? And if it's an IRA, should you choose a deductible IRA or a Roth IRA? This is why there's no better answer I can give you than, go talk to a tax advisor and your financial advisor.

Hey, I want to change subjects here and talk about a subject you probably thought I would never talk about. Gold! And no, I am not going to talk about gold in the concept of crypto. You've heard an awful lot of people say that bitcoin is digital gold, and a lot of people compare the market value of bitcoin to that of gold. What they note is that gold's market value is at about 18 trillion dollars. Bitcoin's market cap is about 2 trillion. Many people believe that bitcoin is going to replace gold as a favored investment, as a store of value.

And if that were to occur, bitcoin's market cap currently 2 trillion is going to rise to 18 trillion, and that would represent a 9X increase. in the value of bitcoin. Bitcoin's current price at $100,000 will become $900,000 in value under that concept. But no, that's not what I'm here to talk to you about.

What I'm here to talk to you about is literally gold. Should you own gold as an investment? My attitude is, and has always been, sure. Why not? If you believe in a long-term diversified portfolio, you’ve got to admit gold is a legitimate asset class. And if you believe in modern portfolio theory, and the notion that different assets have different risks, different reward potential, different levels of liquidity, sometimes they rise or fall in value at different times than other asset classes, that's what rebalancing is all about.

So why not own gold as part of your portfolio? Now, I'll tell you why a lot of people don't do it. Gold's heavy. It's bulky. It's cumbersome. And buying it… it's an unregulated asset. Gold is not a security any more than baseball cards or rare stamps. So where do you buy it? How do you buy it? Where do you store it? How do you safeguard it? And when you're ready to sell it, how do you do that? And what are the commissions you're going to have to pay along the way?

This is why a lot of people who do buy gold buy GLD. GLD is the ticker symbol for the SPDR Gold Shares ETF. This is an ETF launched by State Street Global Advisors (SSGA). State Street, one of my sponsors, is one of the largest asset managers in the world, with over $4 trillion in assets under management. And they launched the very first gold ETF. Twenty years ago, way back in 2004, the SPDR Gold ETF was the very first gold ETF brought onto the market. And it was so astonishing that in just three days, investors threw a billion dollars at this ETF. Another seven days later, the fund held $2 billion, and now GLD has $74 billion in assets under management.

In fact, there are a lot of copycat ETFs that invest in gold, but GLD has 60% of all the assets that are in all of these gold ETFs. In fact, it's twice as big as the second biggest gold fund and shows you the value of being first in the marketplace. Where does State Street store the gold? The same place the government does. The gold bars are in vaults in London and New York.

So why do so many people express so much interest in owning gold? Well, I mean, gold has been a store of value for 5,000 years. Almost half of all the gold that people buy is for jewelry. You get to wear it. You can't wear your mutual fund shares, can you? So, you get to enjoy your gold. And 28% buy it strictly as an investment. They buy gold coins, or they buy small bars or they buy shares of ETFs like GLD.

The governments, they buy a lot of gold. 17% of all the gold in the world is bought by central banks to use as reserves. The United States has a massive gold reserve, of course, Fort Knox. The remaining 8% is used by industry and technology. You know, there's gold in an awful lot of products you're not aware of. Gold, by the way, there's a bunch of it in your smartphone. Gold has excellent connectivity. It's resistant to corrosion. It's malleable and you can't make it disappear other than throwing it away. It doesn't go away.

All the gold that has ever been mined in the world. still exists today. And that's what some people argue is a negative side of gold. The supply constantly increases because it's not like corn. You never use it up and have to go plant more to get more. Whatever gold they dug out of the ground last year will be there next year.

And 5,000 years ago, the Chinese used gold to treat smallpox and skin ulcers. Today, the medical community still uses gold. It's used to treat arthritis. It's used in stents and cardiac surgery. Gold nanoparticles are used to deliver chemotherapies. Gold is used, of course, in dentistry. I'm sure you’ve seen people with gold teeth. It's used in aerospace. NASA uses gold as a heat shield for astronauts. It's used in construction, cosmetics, and printing. Gold in window glass helps insulate homes. It's used in cosmetics, topical creams, lip balms, moisturizers.

Gold plating is found in wristwatches, eyewear, fountain pens, you name it, you can even eat gold. High-end restaurants add gold shavings to sushi and ice cream and coffee. And the demand for gold is therefore pretty stable. And in some areas, it's been rising in the electronics industry because we're doing more and more with smartphones and computers and such demand there went up 11% this year.

And of course, you know the one thing people love to say about gold, they say that it's a great inflation protector. And that's the number one reason people say they like to buy gold that the government devalues the dollar all the time by printing more of them. But gold they say -- because the supply is relatively fixed, it grows at a relatively small pace compared to the printing of dollars --gold is a good inflation hedge.

And generally that's often true, although not always true. But still inflation is a big sales pitch behind gold. We know that central banks demonetize their currency. You look at geopolitical tensions like Russia and Ukraine and Israel's defense against Hamas and Hezbollah and Iran. You look at what's happening with China-Taiwan problems and on North vs. South Korea.

You know, if a currency falls in value, people don't want to hold on to the currency. They want gold and more recently bitcoin, but we're not talking about bitcoin here. Gold has long been used as a portfolio diversifier. It's common to see advisors recommend allocations of as much as 5% toward gold and other precious metals. You've got capital appreciation potential and historically low correlation with other asset classes, which means just because the stock market falls doesn't mean the price of gold does.

In fact, the thing that causes the stock market to go down, inflation, often causes gold prices to go up. I mean, there are a bunch of other commodities and alternatives. There's oil and real estate currencies, of course, silver and platinum as alternative metals, but gold stands out kind of by itself the way, just like in the world of crypto, there's a whole bunch of different crypto, but then there's bitcoin standing by itself.

So, gold kind of does that as well. And just look at this year, for example, and it's only an example, not meant to suggest anything other than that. Gold has outperformed the stock market this year. Not by much, but it did. The stock market is up a little over 22% and gold is up a little bit even more. So, this is why people are attracted to gold and there are lots of different ways you can buy it.

I mentioned, of course, the gold-backed ETFs like State Street’s GLD ETF. You can also invest inv gold mining stocks, or ETFs that invest in gold mining stocks. In other words, here's the attitude of, “I'm not going to buy the gold. I'm going to buy the companies that find the gold” on the attitude that it's cheaper to mine it than it is to own it. That's one theory.

You can buy gold directly. You can buy gold coins like the American Eagle gold coin or the Canadian Maple Leaf coin, the Krugerrand, and you can take physical possession of the gold coins. Even Costco has been selling gold coins lately.

But when you buy gold coins, you've got two issues. Number one, the commissions, the fees. How much are you going to pay to buy it at Costco? They're charging, I think, one and a half percent to buy gold coins from Costco. But here's the thing. When you go to sell it, you're going to pay that commission all over again. And oh, by the way, all the people that have been buying gold from Costco, guess what they aren't really paying attention to. Costco will not buy it back. So even though Costco makes it really convenient and simple and easy to buy the gold, you're on your own if you ever want to go sell it, and who are you gonna sell it to? And how do you know you're getting a fair price? And what's the commission you're going to have to pay when you do go to sell your gold? So number one is fees and commissions.

Second, the safekeeping. Where are you going to keep your gold? You’ve got to keep it safe. You’ve got to make sure you don't lose it. You’ve got to make sure it's never stolen. And that creates a bit of a hassle factor and potentially an expense. If you're going to go rent a safe deposit box at your bank, there's an expense you're incurring for doing that. So, gold bars, gold coins, and oh, by the way, it's a relatively illiquid asset. What are you going to do? Walk up to the supermarket one day because there's been a banking crisis in America and you need to buy bread? Good luck using a gold coin to buy bread. Not really going to work, is it?

One other final way is gold futures. Futures and options contracts trade in the securities markets and instead of buying gold, you can make a bet on the future price of gold. This is very risky and speculative because you not only have to be right about what the future price going to be You have to be right about when that's going to happen because these futures contracts and options contracts, they all expire. And even though you're right, if you're not right within the proper timeframe, your investment is as worthless as if you were wrong.

This is why you're getting the sense of it. Aren't you? Why GLD is such a popular way for people to have an exposure to gold in a convenient, easy way. An easy ETF wrapper that you're very familiar with part of your brokerage account.

You can easily rebalance it with the rest of your assets. You don't have to worry about commissions. You don't have to worry about safekeeping. You don't have to worry about the burden of holding the physical asset. GLD. Now you get a sense of why this thing has got nearly $75 billion in assets inside it.

I encourage you, if you are interested in adding gold to your portfolio, Go to ssga.com to learn all about the State Street Spider Gold Shares ETF (GLD), or better yet, ask your financial advisor.

It's hard to believe that it's been 35 years on the air. I've done more than 1,500 radio broadcasts over the last three decades, more than 500 podcasts in the last three years alone. And my podcasts are winding down. My last one, as I've told you is December 27th. I'm so glad you've been with me all these years. If you want to stay connected with me, be sure to join my distribution list.

Just click on the link in the show notes. I'll make sure you continue to get the latest that I offer on exponential technologies, crypto, Alzheimer's, longevity, investing, all the topics that matter most to us all. Thank you for being with me all these years. I'm looking forward to many more with you.

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Links from today’s show:  

SPDR Gold Shares ETF from State Street Global Advisors: https://www.ssga.com/us/en/intermediary/etfs/spdr-gold-shares-gld

State Street Global Advisors: https://www.ssga.com/

1/15 Webinar - Your Crypto Questions Answered: https://dacfp.com/events/your-crypto-questions-answered

12/10 Webinar Replay - The Retirement Revolution: ETF Solutions for Modern Retirement Planning: https://www.thetayf.com/pages/the-retirement-revolution-etf-solutions-for-modern-retirement-planning

12/9 Webinar Replay - What the Election Results Mean for Crypto:  https://dacfp.com/events/what-the-election-results-mean-for-crypto

2/24-2/26 Wealth Management Convergence-2025: https://www.thetayf.com/pages/convergence

11/13 Webinar Replay - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay - Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

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