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.”Are you getting our free Daily Update
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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, you’re far more prescient than I.
Really, this is just another way to buy exposure to gold through your brokerage account — it’s a relatively reasonably priced way to do it right now, and it comes with some tax implications for taxable investors, but you’re just buying gold… it’s not magically better than buying gold in other ways.
PHYS has tracked almost exactly with GLD over the past year, and even if you go back to the IPO of the PHYS trus in February 2010 the overall return of PHYS (2.6%) has been very close to the return of GLD (5%) for those 5+ years — if you bought PHYS when it was trading at a serious premium (more than a half a percent or so) you made a mistake and you lost money because that premium rightly withered away, but buying PHYS at within a whisker of NAV, which you can usually do with some patience, would have gotten you the same returns as buying GLD (or more, if you were prescient enough to sell when the premium has briefly popped higher from time to time during moments of gold enthusiasm). The risk is that, unlike GLD, there’s not a lot of liquidity or a strong mechanism for the share price tracking NAV every day — so if gold collapses and everyone wants to sell at once in a panic, the shares could easily be trading at a big discount to NAV just when you might feel the urge to sell. That could theoretically happen with GLD too, I suppose, for brief windows of time, but it’s much more of a risk with PHYS.
And there’s also the much smaller Merk Gold Trust (OUNZ), which is more redeemable than PHYS for individual unitholders — their minimum fees mean that it only makes sense if you own about 40 ounces worth, but they’ll redeem into gold coins and send them to you for a per-ounce fee of $25-60 (minimum fee is about 40X that amount, which is probably why you’d want to redeem for at least 40 ounces). That, likewise, has traded pretty much exactly in line with PHYS since OUNZ went public about a year ago.
On the more volatile side of things, if you’re interested in closed-end vehicles for buying precious metals you can also check out the Central Fund of Canada (CEF), the granddaddy of closed-end bullion funds. They own both gold and silver bullion (and have separately traded funds for those two metals as well, Central GoldTrust (GTU) and Silver Bullion Trust (SBT in Canada, SVRZF OTC in the US)… none of those promise delivery but they say 95%+ of NAV is invested in physical metal that they control, all of them are at substantial discounts to NAV, they’re also likely to fall under the PFIC rules when it comes to taxes.
Tiwari also says that he’s got a special way to buy this fund (or something else gold-related) to help hedge against the rising dollar — since, like most commodities, a rising dollar will make the value of the commodity fall in dollar terms. Here’s how he puts that:
“When the dollar is rising, gold prices either stagnate or fall.
“I’ve found a way for you to own this investment that takes most of that currency risk out of the equation. It’s a hedge fund trick I picked up from my days on Wall Street.
“Anyone can do it. It’s just a second button you check when you go to your brokerage account.”
I don’t know exactly what his “hedge fund trick” might be, but presumably he means that you hedge your gold exposure by also going long the dollar in some way. The most widely traded pure “dollar bull” currency trading ETF is the PowerShares DB US Dollar Index Bullish Fund (UUP), which trades futures to bet on the rise in the US dollar versus a basket of other major world currencies.
I suppose you could use long-term call options to give yourself a bit of exposure to this fund and go bullish on the dollar if you want to hedge some of that “risk” of a rising dollar and what that might mean for your gold position, but keep in mind that none of this is presumably in a vacuum — you hold other stuff in your portfolio, too, and if you’re a US investor you probably have your savings account or other cash assets that are effectively “dollar bull” bets because they’re just, well, dollars.
And any sneaky stuff you think you might want to try, like buying gold using some other currency than the dollar, is, for most small investors, just silly and expensive — you’re going to buy that other currency using dollars first, then convert the money back into dollars when you need to spend it anyway, why do you care whether it shows up on your portfolio screen in Canadian dollars or US dollars or Euros or whatever else? If you want to speculate on the direction of currencies then go ahead, and if you want to hedge against the “risk” that the dollar might remain the strongest currency (which is, to some extent given the relationship between gold and the dollar in recent years, like buying gold and simultaneously hedging against gold), then you can certainly try it… but most people lose money in currency trading because of leverage and unpredictable geopolitics and geo-economics (remember the Swiss Franc a few months ago?), and making an investment more complicated doesn’t necessarily make it better. Hedging currencies when you’re buying international stocks (like the very popular currency-hedged ETFs for Japan or Europe or almost anywhere else that have cropped up in recent years and done very well) makes a lot more sense than hedging currencies when you’re buying a precious metal, in my opinion, particularly when countries are actively trying to drive down their currency in order to benefit their export-focused corporations.
If you want to go even further into the currency/gold stuff, there are also now a couple actively managed ETFs that trade futures — both using the Gartman name, for the insufferable sometime CNBC commentator and longtime newsletter writer. The AdvisorShares Gartman Gold/Yen (GYEN) and Gold/Euro (GEUR) funds effectively go long gold options and short the options of whatever currency to get exposure that would be like using Yen or Euros to buy gold. Both of those have done far better than gold this year because the Yen and Euro have both gone down so much.
Gold is usually thought of as a way to maintain purchasing power even though most “paper” currencies depreciate over time most of the time (because central banks try to provide a decent “not too hot, not too cold” level of perpetual price inflation by increasing the money supply), and I hold a little gold for largely that reason, but just because it has historically been a “store of value” for many long periods of human history doesn’t mean it will be a store of value for the next year, or even the next five or ten years. It’s more a diversification of savings in my mind than it is a speculation on gold prices.
So… there you have it, Teeka Tiwari must be teasing the Sprott Physical Gold Trust (PHYS), and perhaps he’s doing something extra-crafty to partially hedge against that bet by also betting on the dollar. Sound like your cup of tea? Let us know with a comment below.
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