The Safest Ways to Invest in Gold and Silver 11 comments
-
Font Size:
-
Print
- TweetThis
I am often asked what is the best or safest way to get exposure to precious metals. To be sure, there is a dizzying array of options from owning and storing the physical metal yourself to buying junior mining stocks. But the current crisis of confidence, brought on by the collapse of institutions that nobody thought could fail and the most recent $50 billion Ponzi scheme, has investors looking at safety and wealth preservation more than ever.
Buying physical gold and silver gives the owner definite possession, but comes with high premiums and the necessity to store and protect the metal. This can be done via a bank safe deposit box, but adds to the cost of owning the metal and doesn’t provide total peace of mind for many investors that have lost trust in the banking system. Others might prefer to store the gold on their property, hiding it in the floorboards or purchasing a safe. But this potentially puts you and your family members in harm’s way and again does not offer 100% security.
For investors that prefer not to hold the physical gold, yet place a high value on the safety of their investment vehicle not to default, I recommend the Central Trust of Canada (CEF) or its all-gold counterpart, the Central Gold Trust (GTU). Unlike the popular ETFs such as GLD and SLV, these funds do not lease out your gold and they always maintain 90% or more of assets in unencumbered, segregated and insured, passive long-term holdings of gold and silver bullion. Trace Mayer of Runtogold.com, recently published an article detailing the risk of investing in GLD and SLV. James Turk and others have also covered the unanswered questions about these ETFs in earlier articles.
Setting itself apart from the competition, the stated investment policy of the Board of Directors requires Central Fund to maintain a minimum of 90% of its net assets in gold and silver bullion of which at least 85% must be in physical form. On July 31, 2008, 97.6% of Central Fund’s net assets were invested in gold and silver bullion. Of this bullion, 99.3% was in physical form and 0.7% was in certificate form.
Central Fund’s bullion is stored on an allocated and fully segregated basis in the underground vaults of the Canadian Imperial Bank of Commerce (CM), one of the major Canadian banks, which insures its safekeeping. Bullion holdings and bank vault security are inspected twice annually by directors and/or officers of Central Fund. On every occasion, inspections are required to be performed in the presence of both Central Fund’s external auditors and bank personnel. Central Fund’s chief executive comments:
Our bullion is stored in separate cages, with the name of the owner printed on the cage, and on top of each pallet of bullion it states Central Fund or Central Gold-Trust. This disables the bank from using the asset from any of their purposes. We also pay Lloyds of London for coverage of any possible loss.
Adding to investor peace of mind, CEF has been around since 1961, is based outside of the U.S. (Calgary, Canada) and is run by a board that is respected in the precious metals community, not a bunch of corrupt Wall Street cronies. Demonstrating transparency that is much needed in today’s investment climate, Central Fund makes regular trips to visit the assets and takes their auditors with them. And you get the sense that you are dealing with honest gold investors and not slick marketing or public relations specialists by taking a quick perusal of the CEF website. While they aren’t going to win any design awards, the website is packed with all of the investor information necessary for due diligence.
On the downside, CEF does come with a hefty premium (currently at 16% to NAV). But this premium is less than the premium you are likely to pay on physical bullion, so it is a non-issue for me. And while it is a greater premium than GLD or SLV, I am willing to pay it since I have about as much faith in those ETFs as I do in the Comex.
Tax implications are another deciding factor. Ian McAvity, founding director and advisor to CEF, said there are definite tax advantages to CEF as opposed to an open-ended ETF. Long term gains in the gold ETFs (and presumably Barclays’ silver ETF) would be taxed as collectibles at 28%, according to the Gold ETF prospectus. As a passive foreign investment company with shares not convertible into bullion, CEF is believed to qualify as a passive foreign investment company [PFIC] to enable the 15% capital gains tax treatment, which can be an important factor for investors with long-term ambitions and taxable accounts, said McAvity.
Lastly, we should consider the performance of the various investment options. Year-to-date CEF underperformed by 3 points versus GLD, but this is largely due to the silver exposure. A more fair comparison would be to use Central Gold Trust. GTU significantly outperformed GLD (14 point gap), which should ease any concerns investors have about a higher premium. CEF and GTU offer not only more peace of mind, but better returns compared to the “trust us, the gold/silver is there” approach from iShares or SPDR. It is also interesting to note that the Gold Miners ETF (GDX) is the worst performer year-to-date. This could change as precious metals prices take off in 2009, but I am inclined to park at least half of my gold/silver investments in a safer place than stocks or funds that can’t prove that they actually have physical gold to back my investment dollars. Year-to-date returns are as follows:
click to enlarge
While GTU has outperformed CEF during 2008, I expect silver to outperform gold during the next upleg and thus I own and favor CEF for 2009. Regardless, both of these funds represent sound investment choices during a time when there are fewer and fewer safe places to park your assets. Peace and prosperity to all.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 11 comments:
Good article. I received lots of questions about CEF and because I have not researched it was unable to give an opinion. I will be able to point them here. It appears that CEF is safer than GLD or SLV and a relatively good investment vehicle.
"Of this bullion, 99.3% was in physical form and 0.7% was in certificate form."
However, it does seem to be slightly different from the more expensive allocated storage with something like Turk's GoldMoney where the bullion is actually titled in the Holding owner's name.
www.runtogold.com/gold.../
I suppose it all depends on how much risk an individual wants to assume. I came across one comment about my article which I think is applicable: "It does not matter until it is the only thing that matters."
As I write, GTU is up 10.75% today while GLD is up only 1.17% (?)
On Dec 17 11:49 AM Internet2k4 wrote:
> I don't understand the premium to NAV for GTU over GLD. I've been
> in and out of GLD for years, and it always tracks close to the spot
> price for bullion. Lately I'm using the double-long/short ETFs instead,
> which are volatile by design, but what is it with the huge markup
> for a trust that simply holds the metal? Do they spin it from straw,
> like Rumpelstiltskin?
>
> As I write, GTU is up 10.75% today while GLD is up only 1.17% (?)
I will take umbrage with your advice. First, putting ANYTHING of value in a safety depost box in a banking institution is INSANE, period. Reason: Should Obama decide to do away with the owning of gold (or anything of value) the FIRST place to be ransacked by your government is safety deposit boxes. Telling UNEDUCATED investors to buy ANYTHING of value using PAPER as their proof of wealth is also INSANE, and is a disgrace coming from you, educated on such matters. PHYSICAL OWNERSHIP is the ONLY way, period. Paying premiums? Well, one must shop for ANY items of need or want, right? Same with gold and silver. At this writing, we are at a time when buying precious metals is a MUST. Prices are at basement levels. If you think not, just wait a few weeks. Before the first pitch of baseball season 2009, gold will be four digits. The only question is what will be the FIRST digit???
Oh, I have to safeguard my gold and silver? Fine. I can do that. Oh, maybe someone will rob me, huh? Well, I have educated myself about the firearms I have in my home, I have a concealed weapons license, I go to the firing range at least monthly. So I feel confident I can protect my family, AND my other precious items. Be careful of the advice and recommendations you dole out.
If your worst case scenario comes to fruition, I imagine there will be some warning from the U.S. and time to get out of Canada before they do the same, as opposed to the countries syncing confiscation activities. But I could be wrong. Maybe putting your eggs into different baskets is the safest option. House gets robbed and you still have CEF. Canadian government confiscates CEF gold and you still have your physical bullion.
Anyway, best of luck to you.
On Dec 17 07:28 PM User 30121 wrote:
> Jason, Jason, Jason:
>
> I will take umbrage with your advice. First, putting ANYTHING of
> value in a safety depost box in a banking institution is INSANE,
> period. Reason: Should Obama decide to do away with the owning of
> gold (or anything of value) the FIRST place to be ransacked by your
> government is safety deposit boxes. Telling UNEDUCATED investors
> to buy ANYTHING of value using PAPER as their proof of wealth is
> also INSANE, and is a disgrace coming from you, educated on such
> matters. PHYSICAL OWNERSHIP is the ONLY way, period. Paying premiums?
> Well, one must shop for ANY items of need or want, right? Same with
> gold and silver. At this writing, we are at a time when buying precious
> metals is a MUST. Prices are at basement levels. If you think not,
> just wait a few weeks. Before the first pitch of baseball season
> 2009, gold will be four digits. The only question is what will be
> the FIRST digit???
>
> Oh, I have to safeguard my gold and silver? Fine. I can do that.
> Oh, maybe someone will rob me, huh? Well, I have educated myself
> about the firearms I have in my home, I have a concealed weapons
> license, I go to the firing range at least monthly. So I feel confident
> I can protect my family, AND my other precious items. Be careful
> of the advice and recommendations you dole out.
Seabridge Gold (SA) and Semafo (SMF.TO) are my favorite juniors.
physical holding is clearly not perfect. If I wanted to be worried, the AMEX is also vulnerable unto intself as the listing exchange, as is your broker who places your buy and sell order, as is your milkman, who secretly wants to steal your wife.
I'm not suggesting the "T" word, but at some point one does have to trust whatever system one is plugged into. Afterall, R U sure those coins under your floorboard are real?
While it makes sense to own GTU if you are paranoid, the premium for GTU is insane. It is trading at a 22% premium to its NAV. That is, if the fund decided to close and liquidate its gold assets, you would take an 18% loss if you were long GTU. The only reason you see "better performance" in your misleading chart is because the premium went from 0 to 22% in 2008. As recently as early february, the premium was at 2-3%. For the reasons you describe above, this small premium (a few percent) makes sense (not 22%).
As a further issue, each January the fund issues shares at NAV, and hence each January the premium disappears completely as investors buy the shares at NAV and then sell them in the open market to pocket the difference (20% is not a bad return for a one day arbitrage). Further, once the volatility dies down, GTU can trade at a discount (it did for 9 straight months in 2007), and if you try to liquidate at a discount you are going to take a big loss if you bought at a huge premium. Ultimately, GTU tracks its NAV, and over the long run if you buy at a big premium (like 22%, the current premium) you suffer an 18% loss, which you would not have if you bought GLD, which trades at its NAV.
Finally, if you are trying to invest in gold, the way to do it is to buy something that THE MARKET believes tracks gold. GLD tracks gold almost exactly. Due to its illiquidity (GTU is 1/10th the size of GLD) and the premium/discount issues above GTU does not.
Best,
Nostradamus