Here is something I posted on the first BH thread:
I was reading the prospectus. They have an interesting policy. They reserve the right to make redemptions "in kind" in a hot market. That is, a person who wants out might have to take gold and silver instead of cash. However they do say they would first line up a buyer to buy the metals from the fund holder at the time of redemption. Subject to a spread, though.
It's all because of legal limitations on realized gains from metals for open ended funds. If they make you redeem in kind, they haven't booked the profit. It's not ideal from the shareholder view, but it's a good workaround overall.
That might be why no one has offered a 4x25 fund.
How the fund deals with hot money & redemptions
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Snowman9000
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Re: How the fund deals with hot money & redemptions
I always pictured that policy being invoked as part an end of the world scenario.
I always visualized leading a group of PRPFX investors in a Road Warrior style convoy from Texas to Milwaukee (or wherever the PRPFX gold is stored) to claim our bars.
I always visualized leading a group of PRPFX investors in a Road Warrior style convoy from Texas to Milwaukee (or wherever the PRPFX gold is stored) to claim our bars.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: How the fund deals with hot money & redemptions
Many funds have this provision if I recall. I think it's boilerplate mutual fund disclosure for SHTF market meltdowns. Even the Vanguard funds (if I recall correctly) can hand you a bunch of stocks that you'd have to dispose of yourself at their discretion.
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Snowman9000
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Re: How the fund deals with hot money & redemptions
Really? I haven't see that. Here is what the PP fund prospectus says:
http://www.permanentportfolio.com/pdfs/ ... y-2010.pdf
page 23
Risks of in-kind redemptions — to avoid liability for corporate federal income tax, the Portfolio must, among other things, derive at least 90% of its gross income each taxable year from sources including interest, dividends and gains on sales of securities. Gains on sales of gold and silver by the Portfolio do not qualify as “gains on sales of securities.”? Consequently, profitable sales of gold and silver (as might be required for the Portfolio to adhere to its Target Percentages) could subject the Portfolio to liability for corporate federal income tax. To try to reduce this potential adverse tax result, the Fund may require redeeming shareholders in the Portfolio to accept readily tradable gold or silver bullion or coins from the Portfolio’s holdings in complete or partial payment of redemptions, if it can satisfy a federal tax law provision that permits it to do so without recognizing gain.
page 37
In-Kind Redemptions
Subject to the restrictions set forth below, the Fund may require redeeming shareholders in the Permanent Portfolio to accept readily tradable gold or silver bullion or coins from the Portfolio’s holdings in complete or partial payment of redemptions, if it can satisfy a provision of the Code that permits it to do so without recognizing gain, where doing so would present an advantage to the Portfolio in pursuit of its tax planning objectives over a sale or other disposition of an investment. Although the Investment Adviser believes it is unlikely that the Fund would ever use an asset other than gold or silver bullion or bullion-type coins for any such in-kind redemptions, the assets to be distributed would be selected by the Fund from the Permanent Portfolio and generally would not reflect Target Percentages. In order to reduce the possibility of inconvenience or loss to such redeeming shareholders, the Permanent Portfolio will require a redeeming shareholder to accept an in-kind redemption only if it has arranged a convenient
opportunity for the shareholder promptly to sell the assets through a qualified broker or dealer at a cost not to exceed 2% of their value at the time of the redemption. If a shareholder elected not to use this service, the Fund, at its own expense, would deliver the assets to the shareholder or, at his or her request, to his or her local bank. See “In-Kind Redemptions”? in the Fund’s SAI for a discussion of the Fund’s operating policies for such redemptions.
From time to time the Fund, at the request of a redeeming shareholder in any Portfolio, may distribute readily tradable assets to the shareholder in payment of his or her redemption. To be accepted by the Fund, any such request for an in-kind redemption must be made in writing. The Fund will accept a request for an in-kind redemption only if it has otherwise decided that the asset is suitable for disposition in a transaction consistent with the Portfolio’s investment policies. See “In-Kind Redemptions”? in the Fund’s SAI for a discussion of the Fund’s operating policies for such redemptions.
http://www.permanentportfolio.com/pdfs/ ... y-2010.pdf
page 23
Risks of in-kind redemptions — to avoid liability for corporate federal income tax, the Portfolio must, among other things, derive at least 90% of its gross income each taxable year from sources including interest, dividends and gains on sales of securities. Gains on sales of gold and silver by the Portfolio do not qualify as “gains on sales of securities.”? Consequently, profitable sales of gold and silver (as might be required for the Portfolio to adhere to its Target Percentages) could subject the Portfolio to liability for corporate federal income tax. To try to reduce this potential adverse tax result, the Fund may require redeeming shareholders in the Portfolio to accept readily tradable gold or silver bullion or coins from the Portfolio’s holdings in complete or partial payment of redemptions, if it can satisfy a federal tax law provision that permits it to do so without recognizing gain.
page 37
In-Kind Redemptions
Subject to the restrictions set forth below, the Fund may require redeeming shareholders in the Permanent Portfolio to accept readily tradable gold or silver bullion or coins from the Portfolio’s holdings in complete or partial payment of redemptions, if it can satisfy a provision of the Code that permits it to do so without recognizing gain, where doing so would present an advantage to the Portfolio in pursuit of its tax planning objectives over a sale or other disposition of an investment. Although the Investment Adviser believes it is unlikely that the Fund would ever use an asset other than gold or silver bullion or bullion-type coins for any such in-kind redemptions, the assets to be distributed would be selected by the Fund from the Permanent Portfolio and generally would not reflect Target Percentages. In order to reduce the possibility of inconvenience or loss to such redeeming shareholders, the Permanent Portfolio will require a redeeming shareholder to accept an in-kind redemption only if it has arranged a convenient
opportunity for the shareholder promptly to sell the assets through a qualified broker or dealer at a cost not to exceed 2% of their value at the time of the redemption. If a shareholder elected not to use this service, the Fund, at its own expense, would deliver the assets to the shareholder or, at his or her request, to his or her local bank. See “In-Kind Redemptions”? in the Fund’s SAI for a discussion of the Fund’s operating policies for such redemptions.
From time to time the Fund, at the request of a redeeming shareholder in any Portfolio, may distribute readily tradable assets to the shareholder in payment of his or her redemption. To be accepted by the Fund, any such request for an in-kind redemption must be made in writing. The Fund will accept a request for an in-kind redemption only if it has otherwise decided that the asset is suitable for disposition in a transaction consistent with the Portfolio’s investment policies. See “In-Kind Redemptions”? in the Fund’s SAI for a discussion of the Fund’s operating policies for such redemptions.
Last edited by Snowman9000 on Thu Nov 04, 2010 6:36 pm, edited 1 time in total.
Re: How the fund deals with hot money & redemptions
When I filled out my PRPFX application I did not check the box asking if I wanted them to handle the sale in the event of a PM in-kind distribution.
I think it would be awesome to receive a box of gold and silver from PRPFX.
I think it would be awesome to receive a box of gold and silver from PRPFX.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
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Snowman9000
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- Joined: Mon Apr 26, 2010 5:44 pm
Re: How the fund deals with hot money & redemptions
Well, with the hot money flow into the fund, and the large unrealized gains (I'm guessing) they must have in gold and silver, this could easily come to pass for anyone who gets out during a year of big redemptions. It's a white swan. 
I'm not sure it would deter me either. But it's something to delve into.
My other point is, now we can see why a 4 x 25 fund is problematic. Not that it couldn't be done, but it's not as simple as we might have imagined. The PP Fund is dealing with the issue, but they are the only one willing to take on the hassles. As I used to say about my own business when my peers and I complained about some hassle, if it was easy, everyone would be doing it.
Maybe the fund could be a podcast topic, btw?
I'm not sure it would deter me either. But it's something to delve into.
My other point is, now we can see why a 4 x 25 fund is problematic. Not that it couldn't be done, but it's not as simple as we might have imagined. The PP Fund is dealing with the issue, but they are the only one willing to take on the hassles. As I used to say about my own business when my peers and I complained about some hassle, if it was easy, everyone would be doing it.
Maybe the fund could be a podcast topic, btw?