By Ivan Y.
There are several options for those who want to invest in gold and silver. You could buy a futures contract, an ETF like GLD or SLV, or bullion coins and bars from a dealer. All of these options have one thing in common. You will need to pay at least the melt value for gold and silver, and more than that if you consider markups, fees, and commission. For example, at one large online dealer, a 1 oz. Canadian Gold Maple Leaf is being sold for 2.3% above its melt value and a 1 oz. silver round is being sold for 5.3% above its melt value.
There is only one way you can buy gold and silver for less than the melt value and that is through two closed-end funds: Central Fund of Canada (NYSEMKT:CEF) and GoldTrust (NYSEMKT:GTU). CEF holds roughly 60% gold and 40% silver, while GTU holds 100% gold. These two sister funds passively hold their gold and/or silver at a vault in Canada and they have now been trading at a discount to net asset value for more than a year. Prior to 2013, they had been trading at a premium to net asset value, but that turned to a discount early last year due to negative sentiment towards gold and silver.
Spot gold closed on Wednesday at $1306 per oz. and spot silver closed at $19.77 per oz. Currently, CEF trades at a 4.5% discount to net asset value, which means that its gold and silver assets are being valued at only $1247 and $18.88, respectively. GTU trades at a smaller 2.7% discount. It's gold is valued at only $1270.
These two funds are without a doubt the cheapest way to invest in gold and silver. If there's a cheaper way, please tell me by leaving a comment because I want to know! A third fund that is part of this fund family is Silver Bullion Trust (OTC:SVRZF). It also trades at a significant discount (roughly 4%). However, due to extremely low trading volume, it is too illiquid as an OTC stock in America, and thus not a great investment option. The volume has been zero in four of the last ten trading days.
From Discount to Premium
One day, when sentiment in precious metals is more positive, these funds will move from a discount to a premium. How much of a premium they can trade at is debatable, but keep in mind that if you want to purchase a silver coin or a gold coin from a dealer, you can expect to pay a premium of 2-6%. So I think a 2-6% premium above net asset value would be a fair estimate.
One additional note before I close is that CEF and GTU qualify for the maximum long-term capital gains rate of 20% in the U.S. If you sell a gold or silver coin for a profit, you are subjected to a maximum tax rate of 28% for collectibles. I disagree with the fact that they are considered collectibles, but nevertheless, it is what it is. I believe former Texas Congressman Ron Paul made an effort a few years ago to pass legislation to eliminate all taxes on gold and silver coins, but that predictably went nowhere.
Disclosure: I am long CEF, GTU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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