Earlier this week, when I was looking into Teeka Tiwari’s pitch about stealing from Vladimir Putin, I promised that I’d follow up and look at the gold investment he was also teasing in that letter… so let’s get to it!
His overall spiel is selling something he calls the “New Cold War Playbook” as a bonus report for subscribers to his Mega Trends newsletter, which he says is “on sale” for $99, the biggest push in there was for the US LNG companies and the European utilities who will benefit from the US LNG export boom that’s widely expected… but then he gets into this gold stuff…
“The 5th and final part of the ‘New Cold War Playbook’ may be the most valuable of all….
“Throughout history, nothing has beat gold as a storehouse of wealth.
“And I’ve just found a fantastic way to own it. It’s easy to buy—you can do it through the stock market. Your gold is stored and backed by the Canadian government, so you know it’s safe.”
OK, so that’s not all that exciting — there are lots of ways to buy gold and have it stored safely… but he says there are some special features that make this gold investment better:
“… there are a few extra perks of owning gold this way:
“1) If your stake is big enough, then you are allowed to redeem a portion for physical gold once a month, if you’d like. They’ll ship it to you, and deduct the cost from your stake.
“2) You can own this play in an IRA or Roth IRA.
“3) Finally, if you sell this play, you are only taxed at 15% or so—not the 28% rate that most coins and ETFs are taxed.”
So that gives us our answer — what he’s teasing here is a closed-end investment trust called the Sprott Physical Gold Trust (PHYS). This was super-popular a few years ago, back when gold was flying and people were paranoid that the more popular and liquid gold ETFs like GLD were just “paper gold” and wouldn’t give you any real guarantee if the world financial system collapsed and sent us back to the iron age. The idea that this trust was entirely physical gold (no futures or anything like that) and was redeemable got people very excited.
The fund went public to much fanfare (in gold circles, at least) in 2010, and that Summer the shares briefly traded up to about a 20% premium to the value of the bullion they held. Which was obviously stupid, so it’s good that by 2013 they had settled down (with gold falling) and started trading mostly in line with NAV… or, more recently, at a small discount to NAV. Which is as it should be for a closed-end fund most of the time.
A closed-end fund means that they can’t issue new shares every day and balance out the NAV by issuing more shares and buying more gold when new investors want more like the big ETFs do, or have a redemption mechanism by which institutions and money makers can redeem ETF shares for their constituent parts and therefore keep the shares extremely close to the net asset value. But there is a redemption feature — it’s a pointless one for most individual investors, but it’s there. Anyone who owns in excess of 400 gold ounces (that’s the size of a “London Good Delivery” bar, a traditional storage size) worth of shares in the fund can redeem them and have them delivered. That’s about half a million dollars right now, if you are investing in that kind of size you’re presumably doing some kind of careful assessment about how the management fee of the fund (0.35% annually) compares to the storage fees you’d pay to just have your own vault space somewhere.
The other complication, which might be a benefit for some, is that the Sprott Physical Gold Trust is almost certain to be classified as a Passive Foreign Investment Company (PFIC) every year, which means that tax reporting is more onerous and, if you don’t elect to classify your holdings as a Qualifying Electing Fund (QEF), might be punitive. If you do make the QEF election, which you have to do each year you hold the fund by submitting an IRS form, then you should be able to pay regular capital gains taxes when you sell — the benefit there is that (assuming you hold for more than a year) you can get the long-term capital gains tax break instead of paying the 28% rate that is due on collectible sales (gold coins or bars, and ETFs like GLD, are taxed as collectibles). I’m not a tax advisor, and I’ve never done this — but do be careful if you buy this kind of fund/trust, the PFIC tax regime is the default so if you don’t make your QEF election you can get a nasty tax surprise… and there is some complexity in the QEF forms, though it looks like the PHYS folks are probably good about providing the data you need for the form. (I don’t think that this applies to tax-deferred accounts — you shouldn’t have to make a QEF election for an IRA, as I understand it, because the cost basis doesn’t matter to the IRS).
So that’s the investment — the PHYS trust. I think that for most small investors, the obsessive assessment of the merits of different gold funds is a waste of time — if you’re really just trying to mimic the gold price without the cost of buying and storing your own physical gold, and you want liquidity so you can buy and sell every day, the GLD ETF works just fine and all of the gold ETFs and closed-end funds track the price of gold very closely most of the time. And if you’re specifically obsessed with the legitimacy of the gold physically held by the fund and your chance of getting your hands on it, I think the difference between PHYS and GLD is pretty thin. SPDR Gold Shares (GLD) holds their gold bars in custodian banks, mostly HSBC, and publishes lists of those bars and inspects them a couple times a year… PHYS holds their gold bars at the Royal Canadian Mint, which is a for-profit Crown Corporation. Both could incur some risk and/or expense if the custodian were to go bankrupt, be seized by the government, or have their vault hit by a meteor — if you’re overwhelmingly worried about those risks, or the relatively minor differences between storage with a Crowm corporation versus a bank, then you’ll probably be a lot happier paying the costs of keeping your gold allocation in some physical storage near you. Those are, to my mind, largely minor differences that would come into play only if there’s a dramatic financial upheaval — and if you can predict whether the next crisis we see is more likely to lead to HSBC going bankrupt or the Canadian government seizing the assets of the Mint, and you can also predict how the rule of law will shake out for those who hold assets in custody with those corporations