First and Last Word on Metals and Mining

We have recently been critical of the Sprott gold fund (AMEX: PHYS, TSX: PHY.U) as a way to gain exposure to gold prices because of the large premium to NAV that has been built into the share price as a result of amateurs flocking to PHYS because it is supposedly safer than the alternatives like the SPDR Gold ETF GLD or even the Central Fund of Canada (TSX: CEF-A, AMEX: CEF). Thus we were not surprised that on a day when gold was up about 1%, PHYS actually fell more than 8% after it was announced an offering of 21.6 million units was completed at a price of US$11.25. Way to track the price of gold, Mr. Sprott!

Alas, even after the decline today PHYS still carries an unacceptable 10%+ premium to NAV although it has declined from 23%+ at the close yesterday. We continue to believe PHYS at a large premium to NAV is a terrible way to own gold unless you are a broker who gets to buy it at the IPO price and then distribute it to the retail (and we suspect a few hedge fund) suckers. What a racket and what a great example of markets behaving irrationally.

About silverax

Tom has been told he is arrogant. Unfortunately only very strong medication will apparently chill him out, but he doesn't like to put things in his body that might dull his sharp mind. Which is like an ax. And no, he is not a Scientologist. He can, however, turn lead into silver by concentrating very hard. See picture for proof.
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18 Responses to Sprott Offers More Units, Gold Up but PHYS Shares FallComment RSS Feed

  1. rob

    While I would never buy at a 20% premium I can understand owning this for <10% premium. I don’t understand why those investors don’t just buy physical and store it themselves and that includes John pauulson and his big GLD position. I do own CEF and feel more comfortable with that than GLD or SLV which I also own. Gold is about feeling comfortable and sleeping at night. While GLD may do it for you it doesn’t for me and for a lot of other investors. Didn’t GLD just “add” like 40 tons or so in like a week. While the gold price did rise what effect do you think an announcement by any major buyer that they had just bought and taken delivery of 40 tons of gold on the comex or LBE would do the price?
    We know that there are short shares on the etfs which means there are etf holders without the gold backing it. The JP Morgan et al affiliation is just not trustworthy based on who they are and how they operate-which is rarely in the best interests of their customers.
    There’s funny business going on with CBs and the IMF gold, and who knows where else, with double counted gold stocks, leaseed gold maybe phony sales etc.. It would not surprise me if GLD was also involved. We’ve see metal leaving SLV just prior to a selloff-just perhaps to dump physical on the market and suppress the price. Easy for JP Morgan to do. Oh and aren’t they the biggest short in silver? Sorry I’m a skeptic by nature and that’s why I own gold and don’t trust the GLD and SLV except for trading.

  2. thefroggydude

    Interesting story on Zero Hedge:

    Apparently the Bank of Greece is selling British gold sovereigns for the equivalent of $1,700/oz of gold

  3. @rob
    If you are trading and paying more than 1-2% premium then you are losing money. If you are hoarding and letting some third party into the equation then you are likely to lose money precisely when it matters. PHYS and CEF have nothing on GLD or SLV as far as legal structure and safety of the bullion. If you don’t want to hold GLD or SLV on some sort of moral or ethical grounds then you still have BullionVault and perhaps GoldMoney (if you can pass their new financial rectal exam).

    If I were younger and crazier I’d try to smuggle some B. sovereigns into the country and set up a stall in Athens. Man, those ZH comments — what a group-think circlejerk they’ve got going!

  4. thefroggydude

    silverax :@thefroggydudeMan, those ZH comments — what a group-think circlejerk they’ve got going!

    You never want to say anything negative regarding an article or critical of contributors TD or MS in the comments section. You will get creamed. The ZH articles are very informative though.

  5. PolarBeer

    I don’t know about buying at 10% premium, but I certainly would not sell at such small premium compared to the fake prices coming out of paper mills… I doubt I would get it back on the same terms.

    I think we are ever closer to a situation when there no longer is any agreement on price of gold. Fewer and fewer people are listening to the “leaders” of gold in London or on Comex. This has both dangers (like the PHYS yesterday) and rewords like for the smugglers in Athens… Unfortunately, this is where criminals really shine — they love it and are very good at it. Maybe this is the plan? Attract the mob to gold?

  6. @thefroggydude
    I’ve noticed that. While I don’t agree with much of Zero Hedge, at least it is original.

    Interestingly I think the top could actually come when you can’t sell gold or silver at a premium. I mean YOU as in the retail investor. Back in 1980 while COMEX silver was topping out at $50 the dealers were paying $35 for junk silver bags and less for other stuff. This is one reason it might make sense to hold gold and silver in several different forms and don’t put your eggs all in one basket. Indeed, I could even see a scenario (though remote) where GLD and SLV are trading near par while PHYS, CEF and others are trading at a big discount.

    As for “agreement on price of gold”, I believe the basis is a great tool in settling the argument and will be very useful in helping guide us through the exciting next few years.

  7. PolarBeer

    I doubt I would ever be quick enough to take advantage of spikes like the ones in the 80s…

    But there is another thing — From your comment I gather that you don’t buy the idea that this crisis is an end of the era and we are in some kind of transition to return of gold standard… (Regardless whether peaceful, muddle-through or violent) Obviously for a gold standard to return people would have to start dis-hoarding gold at some point. A stable price and 0 advantage from holding physical would probably be most convincing for most hoarders.

    What are your thoughts on the big, “quo vadis” picture? Is this a re-run or something of a different nature?

  8. @PolarBeer
    You could take advantage of a spike depending on what form you held gold and silver. For example you could definitely take advantage with GLD or SLV.

    Is this crisis the end of an era? Yes, but it is the start of the end if you know what I mean. To be more specific, I think we could have several to many years and perhaps even decades before this thing finally ends.

    To be clear, we are never going to have a classic gold standard. We could have gold taking some sort of official role as a base money or a transitional currency or for ultimate settlement or as part of a real bills system but not the classical gold standard.

    Gold will continue to rise in prominence for the simple reason that debts have gotten away from us (human beings) and can no longer be simply paid down. The debts will either have to be inflated away (good for gold) or the fiat-debt system will die (good for gold). No way to know which way it will happen at this point or when and we could even get a bear market in gold in the meantime.

    Great point about dishoarding, yes for gold to be used in a monetary sense that means people must be willing to part with it. There are several other conditions as well, however, the most critical being that business owners are willing to accept gold as payment. Right now that is not the case primarily because gold is perceived as being more volatile on a short term basis than dollars or other fiat. At some point that could change but dishoarding will only happen if the price is high enough (we won’t know how high that is until we actually get there). And by high price I mean real price (relative to other assets) not nominal. So two conditions that are necessary are (1) very high real gold price that encourages dishoarding (gold is used to buy other assets) and (2) relative stability in gold price. Clearly a January 1980 type spike is not that scenario and neither would be any mania-led price rise.

  9. PolarBeer

    What do you mean by classical Gold Standard? Full convertibility and “Gold Window” in the local bank? — or something else?

  10. @PolarBeer
    The classic gold standard does not allow for any type of alternative currency or adjustment in the money supply: only gold and silver coins or 100% gold or silver backed notes can be used as currency. Will never happen (heck, even historically never really happened for more than a very short time). The reason is that such a system is inflexible and inefficient transaction-wise. A real bills type or similar system with gold as base money or “ultimate risk free asset” (currently this spot is taken by U.S. Treasuries) could work.

  11. Give unto Caesar, ie pay the tax man.

    In the US it would seem to me that ETF’s can reduce your tax burden by over 40% compared to direct bullion investment. If that is correct, it gives a good reason for a premium over physical. Avoiding the tax man can land a person in Jail in most countries so it’s should not be part of an investment strategy.

    People go on about Gold confiscation. The are missing the point that under US tax law, in hyper-inflation 28% ? will be confiscated through tax anyway so why will they need to steal your actual gold. In the last confication the gold was needed to pay foreign governments, this is not needed anymore.

    Being an Australian, these issues are different here. Generally capital gains are taxed the same way for all investments. The GST (Similar to the UK VAT) is applied to all goods and services. Gold, Silver and Platinum are exempt, Palladium, Rhodium etc are not exempt. GST for individuals / trusts etc cannot be reclaimed once paid so it limits direct metals investment two these three. In the UK, it’s my understanding that only Gold is exempt from VAT ? If I am correct, this would place silver platinum etc at a disadvantage.

  12. @fadboy
    I think the guest commentary on Zero Hedge is wrong and being an accountant I am going to look into it further when I get a chance. So far the seminal piece on PHYS from a tax perspective is this: As pointed out therein, the problem with a closed end fund (or any mutual fund) is that any gains on sales by the fund itself in a given year is passed through as taxable to the fund participants. So even if you just buy the PHYS shares and put them in the sock drawer forever, you are likely to have a tax liability in any given year (and it is going to be 28%, not the capital gains rate) whenever the fund has to sell gold. Why would the fund sell gold? Suppose a big fund manager like Paulson the intrepid rope-a-dope-gold-investor decides to redeem his PHYS units for physical gold. If he owns 50% of PHYS and redeems all of it, that means every other PHYS holder will pay taxes on any gains realized by the fund due to Paulson redeeming his shares for the actual shiny stuff. Or suppose for some reason that PHYS starts to trade at a big discount to gold and the fund is forced to buy back shares in order to bring the NAV back to par. Sales of gold used to finance the buyback would be taxable to all fund participants at the 28% long term rate. Among many others, this tax angle is a good argument against holding something like PHYS or another mutual fund as a long term buy and hold. This also applies to ETFs like GLD as well despite the suggestion otherwise in the Index Universe article linked above.

  13. I made this comment because I have never seen a gold analyst talk about the tax implications of gold investment. This is a huge deal and should always be considered up front, as Zero Hedge correctly stated. My investment in Gold and Silver is through a personal trust and it has taken me more phone calls that I can count to get an understanding of the tax on different scenario’s. This must be the single most complicated area of investment. The Gold Bugs are creating a tax trap for their readers if they don’t also consider the tax implications of what there doing. 28% of the profit on bullion is no small amount. In hyper-inflation this is 28% of the total value of the holdings. It’s almost like 1/3 wealth confication by the Govt.

  14. @fadboy
    Quite true, the 28% U.S. tax is a significant consideration. In other countries there could be VAT and other taxes to consider as well. This is actually one argument for having some gold stocks in the portfolio even if you don’t want or need the equity exposure — you usually get a much better tax treatment in most jurisdictions. On the other hand, if it comes down to needed to spend gold to buy butter or bullets, taxes will be the least of your worries.

  15. rob

    28% is only the Feds take. If you live in a state like CA add another possible 10% for them and with the new Health care bill if you make over 250K or so they take another 2% for medicare. More taxes to come over the years I’m fairly sure.
    CEF does qualify for the 15% capital gains. That kind of makes a 7% premium worth the tax difference vs.GLD/SLV. Not sure how Phys plays out.
    That 15% cap gains may be 20% come next year. Tax avoidance schemes will become harder and harder as all governments are clamping down esp. on the underground economy.

  16. Good point, with GLD/SLV you always pay 28% long term whether getting a tax allocation or selling the shares. You only get the 28% treatment with CEF or PHYS if they were to sell gold holdings (not very likely at this point but could happen if a large shareholder wants to redeem at some point in the future). In any case I don’t advise holding any of these for the long term as core, which should be in physical metal in your own secure possession. When it comes to trading, which is what these gold and silver funds should really be used for, the tax treatment differences are mostly irrelevant. Indeed the best way to go would probably be futures because they get long term tax treatment for a portion of gains regardless of the holding period.

  17. @silverax
    I’m sure your aware the Australian Govt is proposing a new tax on mining companies. It’s tanking the small miners becuase it come at a time when resources were turning down anyway. There is a fight between the big miners like BHP and RIO and the Govt and it’s becomming quite public. It looks like the public is 50/50, so not the outcome the Govt was hoping for. Wayne Swan the treasurer is a public joke in Aus. He is quoted as saying the miners only pay about 17% tax. Rio hit back with there numbers and had them independantly audited and their number is closer to 40%. Minerals australia says the industry average is already 43%, The Govt propasal puts this up to 57%est so you can see why the investers and miners are getting unhappy in Aus.

  18. @fadboy
    Good point, gold stocks aren’t immune from over-taxation in some places either.

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