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Scott Schamber
February 26, 2024

The “Great (U.S. IRA) Train Robbery”

When the pen started hitting the paper for this article, “The Great Train Robbery” immediately came to mind. Not the 1963 robbery of £2.61 million from a Royal Mail train heading from Glasgow to London, nor the 1903 American silent film of the same name. I’m referring to a film released in 1979 in the U.S. that starred Sean Connery and Donald Sutherland. I was perhaps 9 years old when I first saw it, but for whatever reason, the plot stuck: in 1850’s England, a master thief plots to steal a large sum of gold from a train. I don’t think it will take long to figure out where this is going.

The subject “robbery” we are writing about today came up during a recent business trip to the US. This trip gave us the opportunity to engage in numerous fascinating conversations, and to see and hear first hand issues on top of the minds of American investors, both professional and individual. One of the most memorable topics was the question of retirement planning in these uncertain times. Clearly, investors and savers on both sides of the Atlantic share many similar fears and concerns, but the tools they have at their disposal are significantly different.

Many of our US clients will likely be familiar with the concept of “gold IRAs”, their pro’s and con’s, their structural advantages and built-in limitations. But we’re pretty sure they’ll still benefit from taking a fresh look at this retirement instrument and from obtaining an updated understanding of the risks it carries today. As for all of our other clients and readers, we hope that the analysis that follows will be as interesting as it will be constructively informative -or at the very least, we hope it will provide food for thought.

What is a Gold IRA and why is it so popular?

A Gold IRA (Individual Retirement Account) is a specialized type of retirement vehicle that allows individuals to invest in physical gold and other precious metals as part of their retirement portfolio. Unlike traditional IRAs, which typically include a mix of stocks, bonds, and mutual funds, a gold IRA is specifically designed to hold precious metals like gold, silver, platinum, and palladium.

Similar to traditional IRAs though, gold IRAs offer potential tax benefits. This means that any profits from investments held in the IRA aren't immediately taxable. In the case of a traditional gold IRA, there are tax deductions on contributions, while a Roth gold IRA offers tax-free withdrawals in retirement. What’s more, gold IRAs are “self-directed”, thereby giving investors greater flexibility and control over their investments. With this type of account, investors can make their own decisions and choose the assets that best suit their strategic goals (within specific parameters and limitations imposed by the IRS).

However, even beyond the obvious tax advantages, there are additional benefits that the gold IRA brings. For example, as opposed to other retirement investment solutions, a unique aspect of gold IRAs is that they allow investors to hold physical metals in the form of bullion coins and bars. Of course, the afore mentioned IRS limitations mean that you cannot simply buy a dozen gold bars and bury them in your backyard as part of your gold IRA – but you can still own physical metals directly by opening an account through a gold IRA provider or specialized custodian that offers the relevant services.

Gold IRA providers are abundant in the US, providing services such as account setup, facilitation of purchases and storage, as well as proper reporting and compliance. They can additionally assist investors in transferring or rolling over funds from other retirement accounts into their precious metals’ IRAs, while they also consult them on their investment options and offer general guidance on managing a precious metals IRA.

“A matter of trust”

Because the custodians role is so integral to the proper management and tax / regulatory compliance of the gold IRA, and because the latter can be very complicated for a “civilian” to navigate alone, many retail investors place their faith (along with their investments ’ fate) entirely in the hands of “gold IRA experts”. Some are indeed worthy of that trust: they are reliable, experienced, and professional. In fact, we know a few that you can really count on. But others are not.

It is important to note at this point that many gold IRA providers are not actually regulated custodians themselves. Very often they have an agreement with a custodian that allows them to use their structures and services, while they solely focus on sales without any restrictions and other regulatory burdens. As the Commodity Futures Trading Commission (CFTC) highlights, “even if they call themselves 'IRA experts’, precious metals dealers often times are not licensed or registered to provide investment or trading advice to retail customers. They are typically salespeople who are paid commissions based on the products they sell. Unlike financial professionals who have a fiduciary responsibility to you, these dealers are not obliged to have your best interests in mind. As a result, commissions and profits often drive their recommendations.”

To be clear, it is true that gold IRAs will generally incur higher fees than traditional IRAs, as they encompass storage and insurance costs. This extra cost is to be expected and it is the price that investors pay to include a tangible, reliable and inflation-proof asset like gold in their retirement portfolio. That being said, one of the most prevalent dangers associated with disreputable gold IRA providers is the practice of overcharging customers through opaque, complicated fee structures, “fine-print” expenses, and charges and hidden costs.

Obviously, this translates into a lot of unpleasant surprises down the road with many investors suffering heavy, unexpected, and unnecessary losses. Most of the time, these losses become apparent quite quickly, but sometimes they can go unnoticed for a surprisingly long time. For example, during gold rallies, investors tend to focus on the bottom line (quite literally): once they see gains on their account, they feel content and they generally don’t bother to investigate any further. Thus, they never realize how much more they could (and should) have made if their IRA provider wasn’t overcharging them and eating into their profits.

But even before all this, before one ever reaches the point of having to tackle surprise fees or overblown storage or insurance costs, bad actors will lay traps for unsuspecting investors from the very start - most deceitful companies sink their teeth into their pray at the purchase decision stage, by offering self-serving advice on what kinds of formats they should invest in.

Instead of recommending industry standard bullion bars and coins, many gold IRA providers will instead promote collectible or “numismatic” coins. While those are perfectly compliant gold IRA investments, they can come with ludicrously higher premiums that can range anywhere from 40% to 200% above the spot price. As a result, the amount of actual gold the client is buying pales in comparison to what they would get if they opted for more commonly circulated and traded formats.

A pertinent example was presented in a Washington Post report, back in July, which recounted the ordeal of Ed DeSanto, a 65-year-old Floridian, who invested a $100,000 lump-sum payout from his pension in a gold IRA in 2019: “DeSanto’s $100,000 investment netted him just $53,000 worth of gold and silver, according to a Post analysis of his invoices — meaning the coins had been marked up 92percent over the value of the metal.” It might sound like an extreme worst-case scenario, but losses of that magnitude are by no means unique.

Too many investors, especially those who are unfamiliar with the gold market, are convinced by dishonest and unscrupulous gold IRA companies that the value of these “premium” coins is certain to go up, as they are often produced in limited quantities and are therefore rare. The company argues that the coins’ rarity ensures their ever-increasing value, according to basic laws of supply and demand.

However, this very rarity actually guarantees the exact opposite outcome, namely a collapse in demand, as obscure formats like that are difficult to objectively value and are generally extremely illiquid. In many cases, investors who need to liquidate fail to find a buyer for these coins in the open market and are forced to sell them back to their gold IRA provider at a fraction of the original purchase price.

Easy pickings

The dangers of employing these kinds of devious and underhanded practices are compounded by the kind of people they are aimed at. Unfortunately, the primary targets of these tactics are the most vulnerable, most trusting, most generous and often Americans with no one to warn or to defend them: the elderly. As the aforementioned Washington Post article reported, there is a worrying and long-established trend of gold IRA providers, ranging from those with questionable reputations and practices to those with actual charges and convictions, that are systematically targeting older people.

They specifically and purposefully do this through ad placements in media outlets their targets follow and through paid endorsements from news personalities or political figures they trust. We’ve read about these types of cases going back to 2010, when Gold line, a company promoted by talk radio and TV host Glenn Beck and Fox News at the time, settled in court for defrauding customers on their gold IRAs: they never admitted to wrong doing, but still agreed to refund $4.5M to former customers.

In most cases, back then and today, the content appears “organic”, i.e. there is no clear disclaimer or other indication that the individual or the platform has been (or will be) paid for this promotion. The sales pitch is often tied to conservative messages and intertwined with commonsensical arguments, like the fact that US government spending and debt is out of control, or that the Fed’s monetary policy direction poses a threat to responsible savers and that the most reliable hedge against it all is gold.

All of this is true, of course, and physical gold is indeed the most reliable hedge against it. Just not the kind of gold these advertisers are offering. Clearly, absurdly overpriced, comically illiquid, and hopelessly unsellable coins are not a sound investment - especially when paired with hidden fees and exorbitant ush existing clients to “go all in before it’s too late”. Seniors are particularly vulnerable to these aggressive techniques. They are also very unlikely to scrutinize the terms and conditions, fee structure and fine print of the contract they are presented with.

Over the last year, the SEC and the CFTC have filed suits against gold IRA companies for targeting and defrauding elderly people. This might bring about a meaningful change, or it might amount to nothing - only time will tell. For now, though, the “Great (US IRA) Train Robbery” continues.

The best defence against predators, crooks and fraudsters remains one’s own informed judgment. This is why in the next issue of the Digger, we’ll dig even deeper into the subject, looking at specific “red flags” and outlining what investors need to look out for to protect themselves.


>>Read more here.

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