Establishing a Gold-Silver IRA with GoldStar Trust Company
Setting up a self-directed IRA with GoldStar Trust Company is quite easy. First, call CMIGS at 1-800-528-1380 and request an IRA packet, which will be mailed immediately. (If you are interested in a Roth IRA, ask for a Roth IRA packet.)
Three simple steps are involved in setting up a gold-silver IRA with Gold Star:
- Submitting completed paperwork
- Funding the account
- Directing CMIGS which precious metals to buy
Step #1 involves completing the paperwork and sending a check for $180 to GoldStar. The $180 takes care of three fees. One fee is for precious metals storage, which is an annual fixed cost of $90.
Fee #2: a transaction fee of $40 (which is incurred with every buy or sell transaction).
Fee #3: $50 for GoldStar's first year's minimum annual fee. To be precise, GoldStar's annual administrative fee is .08% of the fair market value of the assets in the account, with a minimum of $50 and a maximum of $250.
If your IRA will have initial assets totaling more than $62,500, allow .08% for the opening administrative fee. However, it your assets will total more than $312,500, the maximum administration fee will be $250. The administrative fee is billed annually on the anniversary month of the account.
Step #2 involves completing the proper forms to transfer the funds to GoldStar Trust. Normally, the funds are transferred directly from an existing IRA or Qualified Retirement Plan.
In Step #3, the IRA investor directs CMIGS as to which precious metals to buy. After CMIGS delivers the metals to the depository, Gold Star pays CMIGS, and the IRA investment is complete.
Gold Star Precious Metals Storage
The precious metals purchased for GoldStar IRAs are stored at HSBC Bank USA's New York depository, which is one of the world's largest precious metals depositories and is used by COMEX and other major commodities exchanges. (HSBC is one of the world's largest banks with more than 8,000 offices worldwide.) As noted in Step #1, the annual storage fee for a precious metals IRA is $90, regardless of the value of the account.
Storage fees are billed annually in January, regardless when the account is opened. This means that IRA accounts opened late in the year incur higher storage costs for the first year than accounts opened early in the year. Accounts opened late in the year and with the metals delivered in November or December are given a 50% reduction on storage fees. (See "Financial Disclosure" on the IRA Fee Schedule, which comes with the IRA packet, for other incidental fees, such as the $50 cost for closing an account.)
IRA Contributions
$5,000 is the minimum with which an account can be opened at Gold Star Trust Company. With maximum allowable IRA contributions for 2008 at $5,000, anyone who wants to open an IRA that accepts gold and silver investments with $5,000 can do so. Taxpayers age 60 or older may contribute $6,000 annually to their IRAs. After an account is opened, $1,000 is the minimum contribution that can be added to an account.
Investors holding IRAs in other investments, such as stocks or CDs, can transfer those funds to GoldStar IRAs if they want.
Investors wanting to discuss setting up IRAs with Gold Star Trust Company are encouraged to call CMIGS at 1-800-528-1380. If, after getting your questions answered, you want to proceed, CMIGS will mail you a Gold Star Trust Company information packet, which includes an application and other necessary forms.
FAQ's
"Can I put gold and silver coins I already own in my IRA?"
No, IRS regulations concerning IRAs prohibit that.
"Can I hold the metals myself?"
No, IRS regulations require that the metals be held by an approved depository. Even GoldStar cannot hold the metals; consequently, GoldStar has arranged for HSBC Bank USA's precious metals depository to secure the metals.
"What is the maximum IRA contribution for 2008?"
The maximum contribution for 2008 is $5,000. However, taxpayers age 60 or older may contribute $6,000 annually. If you question the amount you may contribute, check with your tax adviser."
"When can I make my IRA contribution?"
You may make your IRA contribution anytime during the year for which you claim the deduction, or during the following year before you file your income tax form. If you file for an extension, you must make your contribution on or before April 15 of the following year.
"Why should I buy gold and silver?"
Diversification is a good reason and is the cornerstone of a solid investment portfolio. Until the mid-1990s, when stocks started producing fabulous profits, most investment advisors recommended balanced portfolios, with mixtures of stocks, bonds, and precious metals.
Stocks provided the opportunity for growth; bonds produced income, and precious metals protected against inflation and financial chaos. But, as the stock market climbed onward and upward, caution was thrown to the wind. Stocks came to dominate most portfolios, pushing bonds to the back burner and precious metals out of the picture. Now appears to be a prudent time to return to a portfolio weighed heavily toward gold and silver, as discussed below.
The second reason for buying gold and silver is that their prices are inversely related to stock prices. That is, when stock prices go up, metals prices go down. This has certainly been the case over the last fifteen years. Likewise, the charts show that when stock prices go down, metals prices tend to rise.
Will Equities move down to their mean and will gold move up?
The graphs also illustrate that stocks and gold revert to their means, middle points between extremes. During the 1990s, stocks went to extremes on the upside, and gold went to extremes on the downside. In 2000, stocks headed into a correction that lasted three years, and gold (and silver) put in bottoms in their long bear markets.
Stocks then years, both can be expected to correct, or revert to their means. Therefore, investors should look for stock prices to fall and metals prices to rise.
With stock action signaling that the great bull market of the 1990s may be over, gold and silver could be the next bull markets. Adjusted for inflation, gold and silver prices are at record lows. Although most high tech and dot-com stocks have suffered severe losses, many "old economy" stocks still enjoy big gains. Now could be a most propitious time for investors to switch from stocks to gold and silver, especially in their IRAs.
"Should I buy gold coins or gold stocks?"
Instead of gold or silver bullion, many investors opt for precious metals mining stocks because they normally yield higher percentage increases than gold and silver when metals prices rise. However, investing in precious metals stocks carries risks beyond buying gold or silver bullion.
The risks are many and varied, and sometimes unforeseen problems can send stock prices plummeting, which, of course, is true of all stocks. Management mistakes cause most mishaps. With precious metals and other mining stocks, the sizes and grades of ore deposits can be overestimated or the cost of extracting the ore can be greater than expected, resulting in lower profits or even losses.
Additionally, businesses always struggle with economic downturns, interest rate increases, labor troubles, governmental interventions, and environmental requirements. Increases in energy costs--even energy shortages--could plague some mining companies, notably those operating in Nevada's famed Carlin Trend.
For disastrous management decisions, Sunshine Mining and Refining Company comes to mind. Once a favorite of silver stock investors, Sunshine traded at $13 in early 1998 on the NYSE. However, by 2000 Sunshine was in Chapter 11, and its stock has traded at less than a nickel on the NASDAQ.
In 1996, Sunshine's management borrowed $30 million and in 1997 an additional $15 million for development of its West Chance ore body at the Sunshine Mine, after which the company is named. Part of the borrowed funds were used to delineate what the company calls a "world-class" ore body in Argentina.
Although management claims the West Chance efforts were successful, management misjudged cash flow and was unable to meet interest and principal payments on the $45 million. Efforts to refinance were unsuccessful, and the lenders took control of the company and mothballed the famed Sunshine Mine. Shareholders wound up with about 3.6% of the company. Unfortunately, this was not Sunshine's only brush with disaster.
In 1972, a fire in the Sunshine Mine nearly destroyed the company. While Sunshine's stock price suffered, the company managed to survive. Now, Sunshine Mining essentially has been taken over by its creditors.
Ashanti Goldfields (Ghana) and Cambior (Canada), two gold producers, also exemplify what can happen to share prices when managements make bad decisions. In early 1996, Ashanti (ASL) traded at $25; in 2000, Ashanti's stock traded below $1.50. In early 1996, Cambior, traded at $16; in late 2000, Cambior's stock traded at twenty-five cents.
Both companies got caught up in forward sales, and their balance sheets were severely damaged by margin calls in 1999 when gold rallied from the $250s level to $338 on the announcement that 15 European central banks would limit gold sales and leasing for five years (The Washington Gold Agreement). Gold's price move caused Ashanti and Cambior to liquidate assets and/or convert loans to equity shares at rates that severely damaged the value of their stocks.
Forward selling remains a threat to other gold mining companies because the amount sold short via forward sales is disproportionate to the size of the gold market. Some estimates have total forward sales equivalent to three to five years of production. One or two small short positions could be unwound with only minor price increases. But, the total position is enormous, and reversing it without the price of gold skyrocketing will be difficult, if not impossible.
Forward selling involves borrowing gold and selling it, and it is done mostly by mining companies because, logically, they should be able to replace the borrowed gold out of future production. Forward selling is profitable because the lenders, primarily central banks, lend with charges (lease rates) of about 1%, sometimes even less. The borrowers sell the gold with effective returns of somewhere between 6% and 10%, depending on the borrower's credit rating.
If the funds from the sales of the gold are invested in high-grade bonds, the borrowers receive probably 6% to 8%, for a tidy margin of 5% to 7%. However, if the borrowers use the funds in operations, thereby permitting them to forego borrowing in the credit markets, then they effectively receive higher rates, depending on the companies' credit ratings.
Hundreds of millions of dollars are made via forwarding selling. The central banks earn fees on an otherwise "sterile" asset. The mining companies earn 5% to 9%, and the bullion houses that arrange the central bank loans and handle the gold sales earn huge fees. Forward selling pays off like a broken slot machine--except for gold mining companies' shareholders. Shareholders lose because forward selling distorts gold's supply/demand fundamentals and puts downward pressure on the price of gold. However, forward selling is not without its risks.
If the price of gold rises, the lenders want additional margin deposits, which is what hammered Ashanti and Cambior. (Despite the borrowers having millions of ounces of gold in the ground, the central banks require "margin deposits," usually US treasuries. This works much the same way as margin deposits do on futures and stock exchanges.) It is believed that some bullion houses have even given the central banks guarantees that the borrowed gold will be replaced. If so, then adverse developments in the forward sales arena could force government bailouts, such as was the case with the Fed-engineered rescue of Long-Term Credit Management.
Precious metals stocks are a way to participate in the gold and silver market; however, compared to gold and silver bullion, stocks are risky. No one ever went broke holding gold or silver. The same cannot be said of paper assets.
If you want to discuss establishing IRAs with GoldStar Trust Company, call CMIGS at 1-800-528-1380. If, after getting your questions answered, you want to proceed, CMIGS will mail to you a GoldStar Trust information packet, which includes an application and other necessary forms.
