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It is the age-old question posed by
virtually every prospective precious metals buyer, "What form
should my allocation to the precious metals asset class
take?". As a tangible asset broker who only deals in
the physical metal for delivery to clients or their designated
depositories, of course, I am prejudiced as to which form I
prefer. However, there are some very good reasons why the
vast majority of your financial allocation to gold, silver, and
possibly the platinum group including palladium should primarily
be in the form of physically possessed bullion coins and
bars. It is all a matter of control and accessibility when
an investor chooses to own precious metals as a hedge against a
myriad of economic and financial disasters that are more than 50%
probabilities in today's world.
I will attempt to construct a chart that grades the four major
forms of precious metals ownership: Physical Metal,
Depository Certificates, Mining Stocks, and Exchange-Traded Funds
(ETF). I do not include commodity futures contracts in this
comparison because this is such a risky way to take a position in
Precious Metals due primarily to the extreme 10:1 leverage
employed AND the inherent volatility in the underlying assets that
only a handful of extremely skilled traders will ever consistently
make money using this avenue. I am also ruling out Open-End
Mutual Funds, the garden variety that most investors are familiar
with, due to the gross inefficiency of these vehicles for
long-term holders; the constant payment of taxes on short-term and
long-term capital gains due to the trading activities of the fund
manager that significantly reduces the net after-tax return of mutual
funds over 5-year and 10-year holding periods. And monies to
pay these taxes must come from outside of this precious metals
holding vehicle because mining stock dividends contained within
the portfolio are more than likely to be insufficient to cover
annual taxes due. Closed-end funds or the now emerging
Exchange Traded Funds (ETF's), a hybrid Closed-end Fund, are not as offending in total
distributions, especially bullion related ETF's; but they are not
the model of tax efficiency either as shown below.
Feel free to comment on this comparison chart, but I think that I
have been very fair in my ranking of each potential form of bullion
ownership, and this comes from 32 years of hands-on investment
experience, both personal and professional to include 20 years as
a former Registered Investment Advisor from October, 1985 to May,
2005:
Comparison of BULLION Ownership Forms
(Scored from 0 to 10 with 10 being
the highest) |
| Rank Criteria |
PHYSICAL |
Certificate
from Depository |
Mining
Stocks |
Bullion
ETF's |
| |
|
(Segregated or
Allocated Only!) |
|
|
| 1. Global Liquidity |
10 |
3 |
7 |
7 |
|
Meaning:
Can the asset be readily sold for a fair market price
anywhere in the world on quick order. |
| 2. Medium of
Exchange |
10 |
2 |
0 |
0 |
|
Meaning:
Can the asset be used in lieu of paper currency in an
emergency situation. |
| 3. Risk of
Embezzlement |
10 |
8 |
4 |
5 |
| |
Holder totally in
control |
Insured, low
historical event; location could be key in future |
Reserves often
overstated; officers compensated w/ options;
nationalization risk |
No real track record
to say this is not a probability |
| 4. Tax Efficiency at
Long Term Sale |
7 |
7 |
9 |
7 |
| |
28% K-Gain Rate |
28% K-Gain Rate |
15% K-Gain |
28% K-Gain Rate |
|
Meaning:
Can the asset provide a high after-tax retention rate upon
sale. |
| 5. Tax Efficiency
during Holding Period |
10 |
10 |
10 |
7 |
| |
|
|
|
Short & Long Term
K-Gain passed to holder due to internal trading activity |
|
Meaning:
Does the asset incur taxes without any action taken on the
part of asset holder. |
| 6. Ease of Valuation |
10 |
10 |
8 |
7 |
| |
23-hour per Day
trading |
|
Analysis of financial
statements depends on accurate reporting |
Constant Premiums
& Discounts to Net Asset Value |
|
Meaning:
How readily can holder determine intrinsic value of asset
in addition to market value. |
| 7. Portability |
5 |
10 |
10 |
10 |
| |
Metal can actually be
sold in USA and repurchased in Switzerland in like-kind
exchange |
|
|
|
| 8. Confiscation
Potential |
9 |
9 |
7 |
6 |
| |
Congress
members will own metals before Dollar collapse |
Congress
members will own metals before Dollar collapse |
Nationalization
of mines or halt in stock trading as real as 1933 repeat |
Easier target, in
quantity, than going door to door in U.S.
|
|
Meaning:
What is the probability that this asset could actually be
confiscated or halted from trading by the U.S. Government. |
| 9. Transactions Cost to
Purchase or Sell |
8 |
7 |
10 |
10 |
|
Long-term
holding assumed, not trading
|
1.5% or
less per transaction |
Determined
by depository but less than 2% |
0.5% per
transaction |
0.5% per
transaction |
| 10. Value Retention
after Holding Period Costs |
10 |
9 |
10 |
8 |
| |
Safe deposit fees are
nominal if utilized
|
Annual storage fees of
1.5% may or may not be tax deductible |
Dividend income is
minor for most mining stocks |
Operating costs of
fund reduce actual bullion held per share |
|
Meaning:
What annual costs exist that could impinge upon the
residual value of the asset. |
| 11. Financial
Reporting Audit Trail |
9 |
9 |
7 |
7 |
| |
1099-B upon
Sale Only, and not in all cases; no reporting on Purchase |
1099-B upon
Sale Only, and not in all cases; no reporting on Purchase |
1099-B upon
Sale in all cases; brokerage records available to S.E.C.
& Treasury |
1099-B upon
Sale in all cases; brokerage records available to S.E.C.
& Treasury |
|
Meaning:
What avenues or reporting exist for governmental tracking &
reporting of the asset holding. |
| 12. Recordkeeping
Simplicity |
10 |
10 |
8 |
7 |
| |
|
|
Stock
Splits & Stock Dividends |
Reinvested
distributions adjust basis |
|
Meaning:
To what extent do adjustments have to be made to the cost
basis during the holding period. |
| 13. Negative Correlation to
Stock Market |
10 |
10 |
4 |
6 |
| |
|
|
See 1987 Crash
response |
No bear market
history, still an equity asset |
|
Meaning:
How correlated is the price activity of the asset to that
of the overall stock market, especially if a loss of
confidence develops in financial assets overall. |
| |
|
TOTAL SCORE
|
118 |
104 |
94 |
87 |
|
Form
of Ownership
|
PHYSICAL |
Certificate
from Depository |
Mining
Stocks |
Bullion
ETF's |
|
|
|
|
|
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Draw your own conclusions from the table above, but there is no
substitute, period, for the actual, physical ownership of Gold,
Silver, Palladium, and Platinum. No one ever got rich by
buying the easiest asset to own. Handling and storage of
precious metals are minor inconveniences compared to the total
security and control that your personal, first-hand ownership of
these assets offer. All other forms of ownership are merely
differing forms of "Promises to Pay", based upon the "full
faith and credit" of the issuer. A bird in the hand is
worth many in the bush.
Respectfully,
David W. Young, President
Wexford Capital Management
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Additional Negative
Considerations on Precious Metals ETF's
from
Jim Willie CB, editor of The Hat Trick Letter, February,
2007 issue at:
AND you may want to consider
subscribing to his very informative newsletter at:
"A
note of brief caution on gold and silver ETF funds under
United States
or
London
managers. At the end of 2006 the total ETF holdings
amounted to 652.2 tonnes gold
worth $13.3 billion, a major force for over a year. One
should note that ETF’s
experienced only limited attrition when gold sold off and
major funds were disinvesting. Regardless, my purpose here
is to remind that the GLD and SLV funds are probably
contaminated and corrupted to some extent. This is a
controversial topic. In general the instruments can work
and aid the precious metals market. An investor has a much
better chance to find integrity in a Canadian fund though,
like IAU and CEF. Every attempt by industry professionals
(like Jim Turk) to check inventory or examine the
certification has been obstructed, indicating disclosure
is a sham, as in no verification. Any claim of Commodity
Futures Trading Commission or Securities & Exchange
Commission oversight is a farce, since not permitted. The
same members of the evil gold cartel have embarked on fund
management, thus untrustworthy since a tiger cannot remove
its stripes. Proper honest legitimate management of the
GLD and SLV requires an ethical transformation, highly
unlikely. Look with scrutiny at their past behavior and
their list of friends, all of which are negative. It is
akin to having Microsoft manage a movement to break away
from PC software standards! My motto is “think
like a thief” and with this gang of crooks, the fund
still carries a bad odor. The ETF funds in my view were
started in order to divert powerful physical gold and
silver bullion demand, and to corrupt such potential
vehicle instruments. The cartel wanted to foil the plan,
to tarnish the path, before others could offer a
legitimate vehicle themselves. The cartel has managed to
dominate the ETF funds now as a result. They are
controlled. Another motive is for the gold avenue to
eventually be blocked as an escape route for money to
leave the
United States
. Turk reports that numerous USGovt
agencies are closing loopholes for escape. The current
corruption and contamination comes in the form of mixing
gold and silver lease certificates with valid vaulted
bullion certificates. If no disclosure, then assume
mixture. So the cartel has found a place in which to dump
gold & silver lease certificates, thus muddying the
golden waters more so. Lastly, reports persist of past
steady short trades executed by ETF funds, which are in
violation of their own charters. Investigative researchers
constantly cite irregularities. These are pyromaniacs
claiming reformation. Remain doubtful.
Why
is the silver ETF in
London
? Didn’t Warren Buffet store his silver there? That
entire story of his selling the entire silver horde early
was a grandiose lie. He was selling futures options
contracts to raise income, got caught on a breakout, and
was called away from his position, a forced sale at a low
option contract price. The point here is that silver games
are played in
London
. The trail of Buffet lease certificates was probably
tracked all over the place, scattered widely, and probably
laced throughout the Barclays books. Connect the dots with
suspicion. My personal conclusion is that without any
ETF funds on the scene, the gold & silver prices would
be 10% higher than today. Many in the gold community point
to the advent of GLD as cause for the huge early 2006
breakout. My view is different, where the presence of the
GLD guaranteed a dead year and massive selloff
from the peak. The peak was due anyway, what with Chinese
buying after abandoned US$ peg to the yuan,
and a monumental Barrick short
hedge book cover fiasco. Try an experiment. Tell Barclays
that you will be in
London
next month and request an appointment. Tell them you wish
to view their silver vaults and examine their
certificates. Entertain them with a story of wanting to
invest $10 million in their fund after inspection. They
will not even return your call, will not open the door,
and if you arrive on their doorstep, will not grant you
entrance. The GLD and SLV have a hidden agenda. They
infiltrated the gold & silver community and earned
acceptance, which has afforded them the opportunity to
contaminate the major ETF funds in existence. My firm
belief is that these ETF funds are just as dirty as
certain gold mining firm hedge books."
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