Why Add Gold to Your RRSP?
Ask the world’s wealthiest investors and they’ll tell you that diversification and balance are key to a strong portfolio. If your RRSP is heavily weighted in assets that are bound to the dollar, such as stocks, bonds, mutual funds and real estate, you are at risk of losing big when the next financial crisis hits. In 2008 in the U.S., it has been reported that the average portfolio of those nearing retirement lost 25% of its value. Some argue that the numbers are much higher, especially for those without any alternative assets or commodities in their portfolios and a heavy exposure to stocks.
Because the price of gold has a significant negative correlation with most other popular investments (see chart below), a small position in the precious metal will likely help to reduce the overall risk of your portfolio. It can serve as both a buffer against market volatility and insurance against the possibilities of large scale economic collapse or run away inflation. History has taught us that in such scenarios, the world’s currencies always take a severe beating.
While the median age of all modern currencies is currently only 39 years old, gold has been around and held a strong purchasing power for thousands of years. It has performed well under every recession and war the world has ever known.
For these reasons, Canadians should consider including some gold in their investment or retirement portfolios. Watch the following video where Kevin O’Leary talks about how he keeps 5% of his net worth in gold at all times.
The position that Kevin O’Leary is taking with gold is actually shared by many other wealthy investors and billionaires. These individuals don’t like the idea of keeping all their eggs in the same basket and therefore know that an investment portfolio that is too biased towards stocks and currencies is risky over the long term. History has taught us that recessions do happen even in “seemingly” prosperous economies.
RRSPs (registered retirement savings plans) and self directed RRSPs provide tax incentives that encourage Canadians to build retirement portfolios. Limited contributions to your RRSP are tax-deductible until the age of 71 (the limit is found on your notice of assessment) and income earned on assets that are held in an RRSP is not taxed. You can open an RRSP at most financial institutions and hold a variety of assets in these accounts.
When Canadians turn 71, they are required to convert their RRSPs into RRIFs (registered retirement income funds). Mandatory withdrawals are then taxed like regular income. There are a number of ways to include gold in these registered retirement portfolios:
- Hold physical gold
- Own stock in gold-mining companies
- Own exchange traded funds (ETFs) that are linked to the price of gold, backed by physical gold or linked to gold stock indexes
- Invest in mutual funds that strategically invest in gold or mining companies
- Buy structured notes and gold linked bonds
Owning Physical Gold: The 2005 Federal Budget Law
In addition to increasing the annual RRSP contribution limit, the 2005 federal budget added certain investment-grade physical gold and silver to the list of ‘qualifying assets‘ (see p.371 of link) eligible to be held in tax-defered income plans, including RRSPs.
Gold and silver coins, bullion bars and certificates that meet specific criteria are considered ‘financial instruments’ by Revenue Canada and therefore are qualifying assets for your RRSP. Gold must be 99.5% pure and silver must be 99.9% pure. Both metals need to be purchased directly from the producer or through a regulated financial institution.
Bullion bars must be produced at a refinery that is accredited by the London Bullion Market Association and contain a hallmark naming the refinery, purity and weight.
Coins must come from the Royal Canadian Mint through distributors who have the infrastructure in place to trade gold and silver coins and around the globe. The Mint does not sell directly to the public. The value of coins held in registered accounts must closely reflect the total quantity of precious metal, not other qualities such as a limited edition coin.
Canadian maple leaf gold coins are a safe choice. They come in different weights, are guaranteed 99.99% pure and are internationally recognized on gold exchanges.
Certificates that represent claims on precious metals held and issued by a federally or provincially regulated financial institution also qualify to be held in an RRSP.
The Ins and Outs of Adding Physical Gold to Your RRSP
There are costs to holding physical gold in your RRSP. First, the gold must be purchased and verified by a third party custodian who reports to the Canadian Revenue Agency. Then, it must be transported and securely stored. All of these steps have associated costs that add to the already-high opportunity cost of holding a non-interest earning asset like gold.
At the same time, holding physical gold provides a level of security that other investments cannot. Even gold that is stored in a distant vault can usually be claimed and shipped at any time. Several companies provide Canadians with the services necessary to add physical gold to their retirement portfolios in accordance with the 2005 federal budget laws.
Questrade was the first Canadian broker to offer the option of holding physical gold and silver coins and bullion bars in registered accounts. An account can be opened with as little as $1000. Any actual precious metal is stored in your name at the International Depository Service of Canada (IDS) or pooled and stored at the Royal Canadian Mint. You can also have it shipped and store it yourself.
Cache Metals is an organization that works through Laurentian Bank Discount Brokerage and Brinks Canada to help Canadians include gold in their RRSPs. The brokerage buys and sells qualified gold and Brinks Canada provides high quality storage.
Silver Gold Bull is an online platform that allows users to trade qualifying gold coins and bars. Assets can be shipped to the purchaser or shipped to one of their secure storage affiliates in Toronto or Calgary.
Other Ways to Include Gold in Your RRSP
Instead of buying and storing actual gold, one can add exposure to gold to their investment portfolio by purchasing gold-related financial instrument. Like owning physical gold, these investments have associated costs, risks and rewards.