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The Precious Metal IRA Loophole

The Precious Metal IRA Loophole

The precious metal IRA (Individual Retirement Account), also known as a gold IRA, was a great leap forward for U.S. retirement savers.  Since its inception in 1998, the precious metal IRA has allowed U.S. citizens to invest funds either tax free (Roth IRA accounts) or tax deferred (traditional IRA accounts) in gold, silver, platinum and palladium bullion.  This has been a boon for U.S. investors interested in tangible assets but, unfortunately, it did come with one big drawback.

The U.S. government currently prohibits the purchase of art or antiques in IRA accounts – basically any asset that can be considered “collectible”.  This depressingly complete ban includes, but is not limited to, artwork, rugs, antiques, gemstones, stamps, coins and alcoholic beverages (like fine wines).  This is a pity, as this misguided policy bars U.S. retirement savers from an entire investment asset class that is tremendously undervalued right now.

However, there is one small exception to this ironclad no art, antiques or collectibles policy.  And it is found exclusively in the small print of the precious metal IRA.  It is a loophole so small that I’m certain the faceless IRS bureaucrats and uncaring D.C. politicians never though anybody could squeeze through it.  They were wrong.

First we need to have a primer about the complex rules surrounding a precious metal IRA.  An account may only purchase certain gold, silver, platinum and palladium coins and bars.  These coins and bars must all have a minimum fineness of at least 99.5% or 995 fine.  In addition, the prohibition on “collectibles” disqualifies any proof coins, which are specially struck under ideal conditions to appeal specifically to coin collectors.

As a logical extension of this rule, any coin that has been third party certified or slabbed, even a bullion issue that meets all the other qualifications, is not allowed.  This is because third-party grading indicates a coin is meant for the collector community and is thus a “collectible”.  Although it isn’t specifically written into the tax code, it is also a fair bet that any coin issued with a predetermined mintage limit would also be forbidden, as this would imply the coin was intended for collectors.

The clear intention of all these rules is to strictly limit your precious metal IRA to bullion coins and bars only.  The minimum fineness requirement alone automatically disqualifies all old gold or silver coins.  All older precious metal coins were originally intended for general circulation.  Because of this they had to be alloyed to increase their hardness and wear resistance.

For example, old, pre-1933 U.S. gold coinage is only 90% fine.  British sovereigns, which have been struck continuously from the early 19th century right up until the present day are 91.67% gold.  Most other old gold coins from the early 20th century or earlier are 90% fine.  Because of the precious metal IRA fineness requirement, all of these gold coins are disallowed.

That removes most gold coins – especially any antique coins with collector’s value – from contention for your precious metal IRA funds.  Effectively, only modern, 24 karat, pure gold bullion coins (and bars) are allowable.  There is, however, one small exception to this rule: American gold eagle bullion coins, with a fineness of 91.67% or 22 karat gold, are exempted.

Interestingly, American gold eagle coins (along with their American silver eagle brethren) possess another important exemption as well.  Proof specimens of these coins are allowable in precious metal IRA accounts.  This is important because these are the only proof coins of any type that can legally be owned in a precious metal IRA.  Apparently, congress carved out a legal niche for these proof coins in a bid to increase the popularity of the U.S. mint’s gold and silver eagle program.  It worked, as these two coins dominate the global gold and silver bullion coin market.

So with all this information about precious metal IRA requirements we can build a list of permissible gold and silver coins:

 

Precious Metal IRA Approved Gold Coins:

  • American Gold Eagles (uncirculated and proof)
  • American Gold Buffaloes
  • Australian Gold Kangaroos
  • British Gold Britannias (2013 to present only)
  • Canadian Gold Maple Leafs
  • Austrian Gold Philharmonics
  • Mexican Gold Libertads (1991 to present only)
  • Chinese Gold Pandas

 

Precious Metal IRA Approved Silver Coins:

  • American Silver Eagles (uncirculated and proof)
  • America the Beautiful Silver Coins
  • Australian Silver Kookaburras
  • Australian Silver Koalas
  • British Silver Britannias (2013 to present only)
  • Canadian Silver Maple Leafs
  • Austrian Silver Philharmonics
  • Mexican Silver Libertads
  • Chinese Silver Pandas

 

Now, this list of gold and silver coins that are allowable in a precious metal IRA might be academically interesting, but I promised you a loophole.  Well, here it is.  When the U.S. Congress created the precious metal IRA, they intended to completely exclude art, antiques and anything that could remotely be considered a “collectible”.  But some of the gold and silver bullion coins listed above are actually stealth collector pieces that have strong numismatic potential!

The implications of this revelation are staggering.  It means that you can legally purchase and own some numismatically-oriented, collector’s coins in your precious metal IRA.  Suddenly, the full promise of tangibles investing in a precious metal IRA is within your grasp.

Now, if you’re the canny type, you might well ask how modern bullion coins can be desirable to coin collectors.  They are supposed to be lumps of gold or silver with their weight and fineness guaranteed by a government.  They are supposed to trade as nothing more than bullion.  But reality has a funny way of interfering with the best laid plans of national governments.

In short, some modern bullion coin issues are far rarer and more desirable than you might think at first.  In addition, coins, like any art form, heavily rely on aesthetics to appeal to potential collectors.  And modern bullion coins, which often adapt renowned historical designs, are undoubtedly the most beautiful coins of the current age.

I won’t go into all the details surrounding why some modern bullion issues have great numismatic potential here.  Instead, I’ll encourage you to read another article I wrote titled: Chasing Perfection – Collecting Gold Bullion Coins.  But this premise isn’t just my opinion; there are a significant number of modern bullion coins that already trade for hefty premiums over spot prices on the open market.

Maybe the best examples are proof and burnished (a special type of uncirculated strike) American silver eagles.  Even common date issues for these one troy ounce silver coins currently sell for well over double their bullion value.  That is a far cry from the average silver bullion coin, bar or round which might sport a modest premium of only 5% to 20% over spot.

However, I believe the best appreciation potential resides in gold bullion coins, which generally have much smaller mintages than their silver counterparts.  The stunningly beautiful Mexican Gold Libertad series, for example, has never had an annual mintage that exceeded 15,000 over the last 20 years.  They are ridiculously rare and undervalued, yet you can still add one ounce “bullion” Libertads to your precious metal IRA for 15% to 20% over spot!

The only better buys are proof Mexican Gold Libertad coins, which often have mintages in the hundreds.  Their mintages are insanely low, especially considering that many circulating issues of coins are struck by the millions or even billions these days.  Unfortunately, the proof Mexican Gold Libertad is considered a “collectible” coin and is not eligible for inclusion in precious metal IRAs.  Only the uncirculated version can be safely purchased in a precious metal IRA.

If Mexican Gold Libertads don’t excite you, there are many other modern gold bullion coins with excellent return potential for your precious metal IRA.  American Gold Buffaloes, Australian Gold Nuggets/Kangaroos and Chinese Gold Pandas all have that winning combination of great design and relatively low mintage.  And their prices are often only modestly above their bullion melt values.

But a special mention should be made for American Gold Eagle coins.  While I don’t believe the normal American Gold Eagle bullion issues have much numismatic potential due to their excessively high mintages, the special uncirculated “burnished” strike and proof examples offer tremendous value.  Proof American Gold Eagle mintages are usually fewer than 50,000 specimens per annum, sometimes dramatically so.  But, in spite of their rarity, premiums are normally quite reasonable at only 15% to 30% over spot, provided you aren’t chasing rare dates.

There is, however, one important detail to note if you decide to add numismatically-oriented gold bullion coins to your precious metal IRA.  It is critical that you choose a custodian that offers segregated storage.  Segregated storage, also known as allocated storage, means your gold is physically separated from the holdings of other precious metal IRA customers kept in the same vault.  This means that if you deposit a certain type and date of gold bullion coin into your IRA, you can pull the exact same coin out at a later date.

In comparison, the more common method of gold storage is referred to as commingled or unallocated storage.  This means the custodian dumps all its customers’ precious metal holdings into a single pile.  If you request to withdraw or sell a coin, they will reach into the pile and randomly pull out whatever date of that type of coin they find.  Commingled, or unallocated, storage is cheaper than segregated storage, but it invalidates any attempts to buy numismatically-oriented coins and must, therefore, be avoided.

Although I haven’t had the chance to use their services yet, Noble Gold is a precious metal IRA trustee that emphasizes their high-security, segregated storage facilities.

In spite of its strict requirements, a precious metal IRA is one of the few ways to invest in tangible assets (other than real estate) in a U.S. retirement account.  And while your local congressman has done his best to shut you out of the lucrative art and antiques market in these accounts, he and his political friends overlooked one small detail.  Take advantage of this little-known opportunity to invest in numismatically-oriented bullion coins in your precious metal IRA while you can.

How Precious Metal Stacking Saved Coin Collecting

How Precious Metal Stacking Saved Coin Collecting

The last time before the present that coin collecting was popular in the U.S. was in the mid to late 1960s.  This mid-century renaissance in numismatics was primarily driven by the impending abandonment of silver in circulating coinage.  For over 125 years, the U.S. mint had used a traditional alloy of 90% silver and 10% copper for nearly all of America’s circulating silver coinage.

However, due to the Kennedy administration’s involvement in the Vietnam conflict and the subsequent inflationary “guns and butter” policy of president Linden B. Johnson, the government began over-issuing currency.  This inflation naturally led the price of silver to rise in the global market.  By the mid 1960s, it had become apparent that the U.S. government would need to replace the silver used in circulating coins before the intrinsic (bullion) value of the pieces exceeded their face value.

This development in U.S. coinage policy cultivated intense interest among the public.  One side effect was the increased popularity of coin collecting, particularly among younger people.  Although it was the twilight of circulating silver coinage in the U.S., it was a golden age for casual coin collectors.

During this period it was still possible to find desirable and rare coins in pocket change.  In addition, iconic older coin designs such as Mercury dimes, Standing Liberty quarters and Walking Liberty half dollars still circulated side by side with more contemporary Roosevelt dimes, Washington quarters and Franklin/Kennedy half dollars.  Children and adolescents everywhere happily sifted through rolls of coins, looking for better date examples to save.

Gresham’s Law states that “bad money drives out good money”.  Consistent with this ironclad economic rule, valuable silver coinage began to be pulled from circulation and hoarded by the mid 1960s.  Coin collectors were blamed as the scapegoat for the resulting shortage of circulating coins, even though it was the government’s short-sighted inflationary policies that had driven up the price of silver in the first place.

Finally, in 1964, Montana senator Lee Metcalf sponsored legislation that temporarily froze the date on U.S. coins and eliminated mint marks in a misguided attempt to make them unpalatable to collectors.  As a result, even though they were dated 1964, the last circulating 90% silver coins were actually struck by the U.S. mint in 1966.  During this same period, the U.S. government also introduced our current, execrable copper-nickel clad coinage.

Although it took a few years, silver coinage inexorably disappeared from circulation.  Once it became impossible to find good collector’s pieces in circulation anymore, interest in coin collecting gradually faded among younger generations.  Although coin collecting was still popular in the 1970s and 1980s, the hobby was a shadow of its 1960s golden age.

By the 1990s, coin collecting had fallen on hard times.  A bubble in third-party certified, or “slabbed” coins in the late 1980s had burst, devastating average collectors who had been sucked into it.  At the same time, high quality, rare date coins from the 19th and early 20th century relentlessly rose in value, pricing collectors of modest means out of the high end of the market.

This unfortunate state of affairs only worsened in the early 2000s.  By this time, the traditional hobby of coin collecting was clearly dying.  The existing collector base was rapidly aging, most having started collecting during their childhood in the golden age of the 1960s.  But there were almost no young coin collectors coming into the hobby to replace their graying ranks.  This was at least partially due to the fact that, since the late 1960s, it was impossible to find desirable coins in circulation.

I got my start in coin collecting in the late 1980s and early 1990s.  And I did so primarily by searching through rolls of half dollars and nickels for the odd, overlooked silver coin.  Even back then, it was no easy task.  Gresham’s law had done its wicked work all too well over the decades.  I did find a few silver pieces though – just enough to keep me coming back for more.

My entrance into the hobby of coin collecting was only possible because of the low prices of gold and silver during that time.  However, in my opinion, the days of sifting through rolls of circulating coinage from your local bank in order to pick out a handful of worn silver specimens ended about 15 years ago.  By the mid 2000s precious metals began to skyrocket in value, thus depriving aspiring young collectors of even this meager avenue of participation.  It looked like the hobby of coin collecting was destined for extinction.

But then a funny thing happened.  Precious metal stacking, the name given to systematically buying physical gold or silver bullion for investment purposes, came to the rescue.  In fact, I don’t think it would be an exaggeration to say that precious metal stacking literally saved the hobby of coin collecting.

Precious metal stacking is the purchase of gold and silver purely for bullion purposes.  But, a significant number of stackers inevitably became interested in the numismatic aspects of bullion coins issued by governments.  This might sound like a contradiction, but some modern, government-issued bullion coins, with their beautiful designs and near-perfect strikes, really do possess great numismatic potential.

It is a short step from precious metal stacking to searching for semi-numismatic, certified MS-70 examples of American Silver Eagles or Australian Gold Kangaroos.  From there, new collectors can branch out in many different directions.  Some gravitate toward older proof coins with their deep mirror finishes and historical importance.  Others look back to the classic early 20th century circulating U.S. coinage that inspired many of today’s most popular bullion coin designs.  Some branch into foreign coin collecting, drawn there by the plethora of attractive modern bullion coins struck by foreign governments.  A few even look further back in time to the origins of coinage in medieval and ancient coins.

Precious metal stacking has completely revived the coin collecting industry.  Not long ago, numismatics was a slowly dying hobby dominated by older collectors who were chasing the coins they fondly remembered from their youth.  Now it bustles with the activity of thousands of new precious metal stackers using gorgeous modern bullion issues as their gateway to further numismatic adventures.  No, coin collecting today is not the same as it was in the 1960s, but it is still here and vibrant, thanks to precious metal stacking.

Chasing the Golden Elephant

Chasing the Golden Elephant

The relationship between a dedicated numismatist (coin collector) and the object of his affection is often like that of a hunter and his quarry.  The savvy collector methodically stalks a coin as if it was prey.  He will conduct exhaustive research, discovering everything he possibly can about the history and lore surrounding an item.  And then he will lay in wait for the perfect specimen to come into view before finally “pulling the trigger” – buying the piece.

A few years ago, I embarked on my own particular quest.  I wanted to buy a nice ancient or medieval gold coin that cost less than $500.  Why under $500?  There were a couple reasons.  First, like many people, I don’t have money to burn.

Second, sometimes I like a challenge.  And finding an ancient or medieval gold coin in good condition for a low price is definitely a challenge.  Any nouveau riche coin collector can just throw fistfuls of his trust fund money at a collecting niche and walk away with an exquisite piece.  But it takes real knowledge (and a bit of luck) to walk into the numismatic market with a strict budget and walk out with a fine specimen.

And so the search began.  I immediately ruled out ancient Roman, Greek, Celtic or Indian gold coins.  Pricing for these pieces generally started at about $1,000 and rapidly escalates from there.  Most medieval European gold coins were out as well.  No, I was going to have to get creative in this hunt and entertain the acquisition of a coin from an obscure civilization or empire.

But rooting around in the bargain bin of ancient and medieval numismatics can be a dangerous thing.  Most coins struck by little known dynasties are not renowned for their fine style or artistry.  Instead, they are often crudely struck, dumpy little coins that are thoroughly unattractive.  If I wanted an eye-catching, visually appealing coin, I would need to exercise great caution.

Next, I looked into medieval Byzantine and Venetian pieces, as well as gold coins from some Islamic dynasties.  But none of these quite satisfied me.  The prices were usually at the very top end of my $500 budget while the coins themselves were often less than impressive.  I needed to set aside any preconceived ideas and embrace the unconventional.  I didn’t realize it yet, but I was engaging in one of the greatest hunts of my life.  I was chasing the golden elephant.

I had always had an affinity for medieval gold coinage from South India.  These little gold badges from the unique Hindu empires of the Deccan peninsula really appeal to me.  But I already owned quite a few examples, and wasn’t looking to add yet another one.  Or so I thought.

But then I saw it – a medieval gold pagoda minted in the 11th or 12th century by the Western Gangas of India.  This delightful little coin features a magnificently bejeweled war elephant on its obverse – hence this article’s theme of “chasing the golden elephant”.  And the medieval kingdom that created this masterpiece was straight out of an Indiana Jones movie, complete with imposing stone temples, dark, tiger-filled jungles and fierce, warring clans.

I had been aware of the existence of this type of coin before I stumbled across this particular specimen.  But I had always shied away previously.  Prices had always seemed a little too high.  And while I personally liked their quirky, ethnographic artistic sensibility, it doesn’t appeal to everyone.

But this golden elephant coin spoke to me; it was special.  Its style was superb for the type, among the best I had ever seen.  In addition to that it was in choice condition – a real beauty.  And the stories this coin could tell if it could speak!  It may have lain for centuries in the treasury of an ancient Hindu temple.  It may have passed through the hands of princes, merchants and rebels.  It may have witnessed bloody battles waged between rival rulers, along with the rise and fall of countless kingdoms over the centuries.

But the best part was perhaps the price – a mere $300.  This specimen had spent too long in a dealer’s inventory and he wanted to move it.  I knew that I would probably never see so fine an example again in my lifetime for the same price.  At that moment, the golden elephant came into focus within my crosshairs, and I pulled the trigger.  I have never once doubted the wisdom of my decision since.

Ancient Coin Hoards – Short-Term Oversupply Spells Investment Opportunity

Ancient Coin Hoards - Short-Term Oversupply Spells Investment Opportunity

A hoard or treasure trove is defined as a collection of valuable objects that have been either intentionally sequestered for safekeeping or lost long ago.  Hoards have been with us for as long as humanity has found delight in precious items.  And a large number of ancient hoards, perhaps a majority, are composed either partially or exclusively of coins.

Many ancient coins that are tremendously popular with modern collectors were actually struck in very large quantities in ancient times.  For instance, it is believed that the iconic ancient Greek silver tetradrachm coins minted by the city-state of Athens during its golden age in the 5th century BC were created by the tens of millions.  However, survival rates are abysmal for Athenian tetradrachms, as well as most other ancient coins, and it is thought that less than one percent of these specimens exist today.  In addition, many of the coins that have survived are heavily worn, damaged or otherwise in poor condition.

In contrast, ancient coin hoards are of great interest to investment minded collectors because they often contain pristine or lightly circulated examples.  A coin hoard may contain dozens, hundreds or even thousands of high quality ancient coins.  This can be a godsend for ancient coin collectors, allowing them to acquire high quality pieces that otherwise would not have endured the ravages of time.  These same beneficial dynamics apply to medieval coin hoards as well.

Just because an ancient coin has originated from a hoard, however, doesn’t automatically make it desirable.  During the twilight years of the Roman Empire, in the 4th and 5th centuries AD, massive quantities of coins were buried by anxious Roman citizens, merchants and legionaries.  Many of these people never returned to reclaim their treasure, which is why their hoards are often found by metal detecting enthusiasts today.

But the coin hoards they left behind usually contain large numbers of late Roman bronze pieces that are small, dumpy and crudely struck.  They are nothing like the magnificent pure silver denarii of the Roman Republic or the stately gold aurei of 1st century AD Imperial Rome.  In other words, coins from ancient hoards can be great for investors, but only if the coin series in question is investable to start with.

While ancient coin hoards are a boon to modern day collectors, there is a market phenomenon related to them that deserves some discussion.  When an ancient coin hoard is found, the coins often find their way to the marketplace fairly quickly.  This usually depresses prices, provided the hoard is large enough in size and dominated by only one or two coin types or denominations.

Some collectors find this disruption of normal market operation to be undesirable.  If they already own that variety of ancient coin, a newfound hoard will temporarily lower the value of their existing specimens.  The sudden price drop and plentiful supply of previously scarce, or even rare, ancient coins can also scare away connoisseurs who were considering buying that issue.

However, these objections are ultimately shortsighted.  Instead, ancient coin hoards should be thought of as a gift from the heavens.  They are wonderful, but temporary, opportunities to acquire rare and desirable ancient coins for far less money than they would normally cost.

A great example of this is ancient Koson gold staters.  These attractive and historically important coins weigh in at an impressive 8 grams of almost pure gold.  They feature three toga-clad Roman figures advancing in a row on the obverse and an eagle clutching a wreath on the reverse.  They are also often struck in fine Roman style.  Put simply, Koson gold staters are top notch, investment grade ancient coins.

Although no one knows for certain where these gold stater coins originated, the prevailing theory states that they were struck by Julius Caesar’s assassin, Brutus, with gold given to him by the grateful Roman senate around 43 or 42 BC.  Brutus used the coins to hire Dacian mercenaries (from modern day Romania) to fight the army of the murdered Julius Caesar’s heir, Augustus Caesar.  Unfortunately for Brutus, his army lost the battle of Philippi in 42 BC and he was forced to commit suicide.

In the early 2000s, a sizable hoard of these ancient Koson gold staters was unearthed somewhere in Romania.  We have no record of exactly where or when the hoard was discovered because treasure hunters are notoriously secretive about their finds.  But a large hoard was definitely unearthed around this time.

Predictably, significant numbers of these ancient coins began to make their way into the market.  Koson gold staters, although usually scarce, were now everywhere.  Being a fairly specialized coin series, there were few collectors of this type.  Supply quickly overwhelmed demand.  Prices plummeted.  At the time, comparable ancient Greek gold staters in good condition might have cost between $1,000 and $1,500.  But the glut of ancient Koson gold staters was so severe that examples in excellent condition were only selling for $500 to $800 per coin.  There was effectively a 50% off sale on the coins.

And these depressed market conditions didn’t last for just a few months either.  They persisted for years, a not unusual situation when very large ancient coin hoards are brought to market.  As recently as 2008 or 2009, it was still possible to buy pristine ancient Koson gold staters for under $1000.  In 2017 those same coins sell for at least $1,500, if not more.

The message is clear.  Savvy ancient coin collectors and investors should take full advantage of hoard dispersals to increase their holdings.  If a hoard is large enough, prices will invariably dip.  Ancient coin series from hoards, even those that were previously rare or uncommon, will become readily available – at least temporarily.

But savvy connoisseurs are like a school of piranhas.  They will keep nibbling and nibbling until the seemingly abundant supply inevitably dries up.  Once that happens, the coins’ true scarcity will become apparent and prices will shoot skyward again.  If given the opportunity, the astute collector should not hesitate to buy investment grade pieces from ancient coin hoards.