THE IMPORTANCE OF HEDGING YOUR RETIREMENT ASSETS WITH PRECIOUS METALS
When governments run out of money they do CRAZY things.
Throughout history, we can look at stories of how governments amassed mountains of debt that always, every single time, come from one fundamental factor.
WHAT IS TRUE FOR AN INDIVIDUAL IS TRUE FOR A NATION
When families spend more than what they make, year after year after year, what happens?
THEY GO BANKRUPT!
What we must remember is what’s true for an individual is also true for a nation. When a country continually spends more money than what they make, year after year after year, a nation will go bankrupt as well.
When a nation is faced with bankruptcy, what should it do? The answer is simple. The same thing you and I should do when faced with an imminent bankruptcy. Cut spending and increase revenues.
What do most governments do? Sadly, the wrong thing. They generally abandon all financial responsibility because they have a printing press.
THE FACTOR IS THIS:Their spending was greater than their revenues. That’s it. It’s not rocket science. It’s just common sense.
Understanding the times we are living in is critical to your financial success.
THE REAL DEFINITION OF INFLATION
When a nation prints money, they increase their money supply. When they increase their money supply their currency is devalued. When a currency is devalued it takes more of that currency to purchase goods and services. Do you get what that means? It’s a very important concept that once you understand will change how you view the world around you.
It means that INFLATION is not RISING PRICES! Rising prices are a symptom of inflation. So therefore, INFLATION is nothing more than an INCREASE in the money supply.
China manufactures TVs, cars, electronics, and all kinds of stuff. They then sel those things to the United States. The goods they are producing have value. The problem is that the United States is printing, printing, printing without discretion to fund stimulus programs, provide bailouts, fund entitlement programs, etc. They are printing so much and devaluing their currency that the rest of the world is starting to view it like Monopoly money!
So, China says, “knock it off United States! We are providing you with valuable TVs, cars, electronics, and all kinds of stuff but you are paying us with junk currency. Therefore, we are going to want more of that junk currency in exchange for our valuable stuff you are buying from us.” Then, they raise their prices.
And that’s inflation! Increased prices were just a function of an increased money supply!
So, how much has the money supply in the United State increased? In the next lesson we will take a look.
UNITED STATES MONEY IN CIRCULATION
In 1971 President Nixon took America off the gold standard meaning money could be printed by government fiat (or by their decree), whenever, and for whatever they wanted. But, whenever a government has unlimited access to a printing press, they will use it. The result is inflation! Sadly, President Nixon lied! I know it’s shocking that a politician would lie, but it’s true.
President Nixon, in 1971, promised that the dollar would retain its full value. It is only worth about 19 cents today of what it was worth in 1971.) THE DOLLAR HAS LOST 81% OF ITS VALUE SINCE 1971!
WHY DOES ALL THIS MATTER?
It all matters because if you are not at least earning the unofficial inflation on your investments, you are falling behind every year. The official inflation rate in the United States in June, 2017 is 1.6%, and the government’s official inflation rate has been below 5% since 2008! This can be found by looking at the Consumer Price Index. Just so you know, the CPI is extremely flawed, and it is flawed for political reasons.
WHY OFFICIAL INFLATION IS WRONG
Let’s take some time to investigate why the Consumer Price Index (CPI) is flawed.
The CPI measures the change in prices of a basket of goods over time. But, there are some issues with CPI figures that relegate the index to little more than useless information.
THE ISSUES ARE
- Arithmetic vs. Geometric Weighting
- Quality Adjustment Issues
Substitution bias is one of the most damaging mechanisms in the CPI.
Example: Let’s say STEAK was an item in the CPI basket, but it got too expensive, thus resulting in inflation. So, the Bureau of Labor Statistics (BLS) actuaries (at their discretion) can substitute steak for hamburger. So, if steak went from $4 to $5 per pound that would be a 25% increase in price. But, when hamburger is substituted, the price of hamburger may be $3 per pound. This would be a 25% reduction in the CPI. But, this is a trick! There was no decrease in the price level. They just changed the item to something cheaper and call that a price reduction. Simply ridiculous!
ARITHMETIC VS. GEOMETRIC WEIGHTING
This gets a bit technical, but in a nutshell the CPI used to utilized arithmetic averaging but the Boskin commission changed it to geometric weighting in 1996. Geometric weighting approximates a substitution effect and over time will understate price levels.
QUALITY ADJUSTMENT ISSUES
The technical term for this is hedonic demand theory which is a method for estimating prices. Yet another TRICKY mechanism for understating inflation.
HOW THIS ALL WORKS
The way this works is let’s say gasoline prices at the pump went from $3 to $4 per gallon. That is a 33% increase in price. But, if a new additive is added to the gasoline that makes the air 40% cleaner, this sinister mechanism would show a 7% decrease in price due to the perceived benefit to the consumer.
33% (higher price) – 40% (cleaner air) = 7% PERCEIVED BENEFIT TO SOCIETY.
We always need to ask why something happens. When you know the fundamental reasons why things happen, you can act accordingly. The Boskin commission was appointed by the U.S. Senate in 1995. Why? They were to figure out a way to understate inflation since so many entitlements (welfare, Social Security and others) are tied to the official inflation rate. So, IF inflation can be understated, the government can save a load of money in entitlement payouts.
THE ELLIOTT TRUE INFLATION INDEX
OFFICIAL INFLATION IS UNDERSTATED. Your wallet will tell you that.
So, what is unofficial inflation? In my dissertation, I developed a new methodology for measuring inflation, and in the next lesson we will look at that formula.
In a nutshell, my research shows that with a 25% margin of error to the UPSIDE only, official inflation is understated by 285.33%.
Current official inflation in June 2017 is at 1.6% (according to the CPI). Based on my research true inflation is:
4.56% – 5.7%
AVERAGE ANNUAL INFLATION SINCE 2000 = 6.12%
Understanding why inflation is understanding is incredibly important. The reason is CPI inflation which is the OFFICIAL inflation measurement vehicle reported by the government, UNDERSTATES inflation, as we have just seen.
INFLATION ADJUSTED MARKET RETURNS
With inflation in mind, let’s look at some common investments that all of us may have and see how they have really performed since the year 2000.
REAL RETURN ON A CERTIFICATE OF DEPOSIT (CD)
Current 1 year CD rates are about .51%
Most people believe this is a guarantee not to lose money. But, with unofficial inflation averaging 6.08%, the guarantee of a CD means since 2000 you will be guaranteed to lose 88.2% of your investment because you are really losing 4.41% per year. LET ME REPEAT THIS!
Since 2000, CDs have a 33.42% gain or 1.67% per year. But, when you account for inflation, the average per year was a -4.41% LOSS.
THAT IS A HORRIBLE GUARANTEE!
REAL RETURN ON TREASURY BONDS
Since 2000 the total return on a 30 year treasury bond is 60.37% or 4.09% per year.
With INFLATION at 6.08% on AVERAGE, a 30 YEAR TREASURY BOND has an average loss of -1.99% per year!
REAL RETURNS ON STOCKS
IN 2000, the Dow Jones Industrial Average was 11,239. By Dec 31, 2019 twenty years later, the DJIA is at 28,462. Some up years, and some down. But average growth per year 6.16%
With INFLATION at 6.08% on AVERAGE, a BROAD BASED STOCK PORTFOLIO would be growing at a rate of 0.08% PER YEAR.
REAL RETURN ON REAL ESTATE
In 2000, the median home price in the U.S. was $185,800. In December 2019, the median home price in the U.S. is $312,500. That is UP 63.81% since 2000, averaging 4.08% per year.
Accounting for inflation, real estate is DOWN 2.00% PER YEAR!
REAL RETURN ON GOLD
In 2000, gold was $289 per ounce. December 31, 2019 gold is $1520. That is UP 195.66% in since 2000! That’s an average of 9.32% per year.
Taking inflation out, gold is still up on average 3.24% PER YEAR!
REAL RETURN ON SILVER
In 2000, Silver started the year at $5.10 per ounce. December 31, 2019 silver is $17.78 per ounce. That is UP 174.78% since 2000, or 9.20% per year. Taking inflation out, and silver is still up on average 3.12% PER YEAR!
COMPARING DIFFERENT INVESTMENT RETURNS THIS CENTURY
Which is the best investment for you to protect and preserve your portfolio? The only way to grow your portfolio over time is to outpace unofficial inflation.
I wanted to go back to 2000 for this study to have a long term analysis, as different assets go up and down at different times, but this span of almost two decades will have ups and downs considered across all markets.
INFLATION ADJUSTED AVERAGE ANNUAL RETURNS (2000-2020)
I was actually very shocked by these results. I was expecting the stock market with it being near all time highs to have been the best. But for protection and preservation over almost two decades, the only three assets that posted positive returns are GOLD, SILVER, AND STOCKS.
A CLOSER LOOK AT THE DATA
IRS APPROVED NON-TRADITIONAL ASSETS IN AN IRA
A TIME AND PLACE FOR EVERYTHING
As these trends continue, expect to see much higher prices in tangible assets and more losses in stock, bonds, real estate and CDs. This should continue until the fundamentals of the markets change, signaling a shift in the trends. The choice all of the sudden seems easy when we sift through all of the disinformation, and try to deprogram ourselves from what we thought were safe investments our whole lives.
THERE IS NO SUCH THING AS A BAD INVESTMENT, THERE IS JUST BAD TIMING FOR INVESTMENTS!
ALLOCATING GOLD AND SILVER INTO AN IRA
Most people don’t realize that physical precious metals can be allocated into your IRAs. I’m not talking about mining shares, precious metals mutual funds, or ETFs. Those are all just paper assets.
Real tangible assets (gold and silver bars and coins) are the best and safest way to allocate into gold and silver. I am about to show you how.
THE IRS ALLOWS GOLD AND SILVER TO BE ALLOCATED INTO AN IRA
The Internal Revenue Service allows different types of precious metals to be held in an IRA. The following coins and bullion products are on the U.S. government-approved list of precious metals.
WHAT KIND OF PRECIOUS METALS CAN BE OWNED IN AN IRA?
The kind of precious metals that can be owned in an IRA are:
- GOLD PROOFS
American eagle gold proof coins are a more “collectible” version of the gold eagle coin. The precise engraving and frosted images that appear to float above the mirror-like background enhance the intrinsic beauty of these designs. The cameo effect on these coins is made possible only with the specifically treated, hand-polished dies, and striking the blanks multiple times to ensure the highest relief possible. Because these coins are such a small percentage of all gold eagles minted they sell for a premium over the price of bullion gold eagles.
Based on supply and demand, the premium on gold proofs can expand and contract depending on market conditions. When purchased at times of low premiums, these coins can offer the advantage of multiplied growth as the coins may grow with the spot price and with premium expansion.
AVAILABLE OPTIONS: American eagle, Canadian maple leaf, Mexican Libertad, and COMEX approved bars and rounds can all be owned in an IRA.
AVAILABLE OPTIONS: Platinum American eagle, Canadian maple leaf, Isle of Man noble coins, NYMEX approved bars and rounds.
AVAILABLE OPTIONS: Palladium bars and coins
FREQUENTLY ASKED QUESTIONS
WHAT IS A SELF-DIRECTED IRA?
A self-directed IRA is exactly like any other IRA, with one major difference. YOU get to choose where your IRA funds will be invested rather than just accepting whatever the IRA trustee of custodian offers. This gives you greater flexibility because you can choose precious metals, stocks, bonds, CDs, mutual funds, government obligations and other investments.
HOW DO I MOVE MY EXISTING IRA TO A NEW CUSTODIAN SO I CAN FUND IT WITH PRECIOUS METALS?
Money in an existing IRA can be moved to a new custodian by either a TRANSFER or a ROLLOVER. A transfer DOES NOT require IRS reporting, and there are NO RESTRICTIONS on how often you can transfer funds. Your CUSTODIAN will contact the previous institution and take care of getting the funds moved. Special rules apply if you have reached 70 ½ , and you should check with the previous trustee or custodian to see if there will be fees or penalties.
CAN I CONTRIBUTE BULLION OR COINS I ALREADY OWN INTO A SELF-DIRECTED IRA?
No. All contributions MUST be made in cash EXCEPT in the case of transfers and rollovers.
WHAT IS THE DIFFERENCE BETWEEN A TRADITIONAL AND A ROTH IRA?
Anyone who has earned income can contribute to an IRA each year. Depending on your income, marital status, and participation in employer’s plans, your contribution to a TRADITIONAL IRA may be deductible. Contributions to a ROTH IRA are never deductible, but qualified distributions from the account are COMPLETELY TAX FREE. Your tax advisor can help you determine which type of IRA is most appropriate for you.
WHY SHOULD I MAKE A CONTRIBUTION IF IT IS NOT A TAX DEDUCTION?
Non-deductible contributions grow tax-free in a ROTH IRA and tax-deferred in a TRADITIONAL IRA. This tax-favored treatment usually makes even a non-deductible contribution a smart move.
MY BANK IRA IS FREE. WHY IS THERE A FEE FOR MY SELF-DIRECTED IRA?
A bank has its fee built into the interest rate is pays you. In addition, a bank probably will not allow you to invest in precious metals. Since the custodian that is holding the precious metals receives no commission from any of your investment actions, separate fees are necessary to cover the cost of maintenance and storage.
HOW MUCH WILL AN IRA DENOMINATED IN PRECIOUS METALS COST ME EVERY YEAR?
It is cheaper than you might think! The majority of the fee is for storage. Since you are purchasing physical metals for your account, they need a place to be stored safely. The fees should range in the $250-$300 range annually, regardless of the amount of metals in your account.
WHEN I QUALIFY FOR A DISTRIBUTION, MAY I RECEIVE THE COINS INSTEAD OF A CHECK?
Yes. These are called “in-kind” distributions and they are permitted. However, upon distribution you will have to pay ordinary income tax in the case of delivery or cash distribution for the year in which they were received.
WHAT SPECIFIC TYPES OF PRECIOUS METALS ARE PERMITTED IN MY IRA?
- American gold, silver, and platinum eagle coins
- Austrian philharmonic coins
- Australian kangaroos, nuggets, kookaburras, and koala coins
- Silver Mexican libertads
- Platinum Isle of Man noble coins
- Gold bars and rounds manufactured by a NYMEX or COMEX approved refiner/assayer and meeting minimum fineness requirements of .999+
- Silver bars and rounds manufactured by a COMEX approved refiner/assayer and meeting minimum fineness requirements of .9995+
- Palladium bars and rounds manufactured by a NYMEX approved refiner/assayer and meeting minimum fineness requirements of .9995+
HOW WILL THE COINS BE PHYSICALLY STORED?
When the coins arrive at the storage facility, the shipment will be opened in order to inspect the contents. The contents will then be resealed in the same shipping box and placed in the vault. This insures the coins that were acquired on a client’s behalf are the very same coins that are delivered.
CAN MY CURRENT IRA CUSTODIAN, BANK, OR BROKER HELP ME SET UP AN IRA IN PRECIOUS METALS?
More than likely the answer is no. The only precious metals IRA that brokers and banks can set up are generally invested in gold stocks and mutual funds which are considerably more speculative and risky.
HOW SAFE IS THE STORAGE FACILITY WHERE MY COINS WILL BE STORED?
Our selected custodians utilize the two oldest and largest private storage facilities in the country. The coins are insured and remain locked in the safest possible environment.
CAN I SELL MY PRECIOUS METALS IN THE FUTURE AND TRANSFER OR ROLL OVER THE PROCEEDS INTO ANOTHER TYPE OF IRA?
Yes. At some point in the future you may choose to take profits on your precious metals holdings and transfer them into stocks, bonds, CDs or any other type of investments that are allowed in IRAs.
Board of Governors of the Federal Reserve System
Boskin, M. J., Dulberger, E. R., Gordon, R. J., Griliches, Z., & Jorgenson, D. (1996). Toward a more accurate measure of the cost of living. Retrieved April 7, 2006, from http://www.ssa.gov/history/reports/boskinrpt.html
Elliott, K. (2007). An empirical identification of an appropriate inflation definition and an inflation targeting monetary regime. Ann Arbor, MI: UMI.
Griliches, Z. (1967). Hedonic price indexes revisited: some notes on the state of the art. Proceedings of the business and economic statistics section, American Statistical Association, 324-332.
Puplava, J. (2005). The Core Rate. Retrieved April 8, 2006, from http://www.financialsense.com/stormwatch/2005/0624.html
Rosen, S. (1974). Hedonic prices and implicit markets: product differentiation in pure competition. Journal of Political Economy, 82(Jan/Feb), 34-55.
Welling, K. M. (2006). Shadowing Reality (No. Volume 8, Issue 4). Greenwich, CT: Weeden & Co., L.P.