Doing Gold Right

[melveyr]

Well, my current 25% allocation to GLD for my gold section is looking increasingly insane the more I read about the prospectus (yes I bought the sucker without reading it!).

I am totally re-approaching how I look at my gold holdings and I am curious how you all manage this vital part of the portfolio.

I am considering going 13% physical, 4% GLD, 4% IAU, and 4% GTU.

I can't fully let go off GLD or its twin IAU because I love how they have tracked the spot price thus far. I am subject to free equity trades so these ETFs making rebalancing a cinch. GTU would have the same benefit of low commissions, but with more tracking error. However, as I understand it, investors feel that GTU has less layers between you and the gold. Also, more counter-party diversification can't hurt.

Also GTU would make tax loss harvesting much easier, because it could allow me to skirt the wash sale rule.

Any thoughts? How are you guys managing this part of the portfolio?

[MediumTex]

Wiith GTU you are also buying premium risk--i.e., the risk that the premium to NAV is going to fluctuate significantly, which can be a good thing at times and a bad thing at other times (depending upon what the premium was when you bought your shares).

My Mother has a good bit of silver that she took out of circulation in the early 1960s when 90% silver coins were no longer minted.  That silver has sat in a box for almost 50 years now, no commissions, no fees, no management expenses and no taxes.  As PM ETFs have soared in popularity I have often thought about how that box of silver coins, if they had instead been an equivalent number of shares of a fund like SLV, would have long since seen most of their value deteriorate in the form of fund fees and other expenses.

The PM ETFs can be a good tool, but I think it's important to remember that these ETFs are probably not suitable for long term holdings, not necessarily because they are scams, but simply because they are not consistent with the whole idea behind the PP, which is to place a certain amount of your wealth outside the boundaries (and associated risks) of the existing financial system.

[steve]

I like your idea to hold 13% physical.
I personally like GTU, the premium happens to be low right now, but the two main reasons I prefer GTU over any other gold fund are  the gold is allocated and also in a taxable account it is not taxed as a collectable when you fill out the proper paper work. To me these advantages make the premium risk worth it.

Wiith GTU you are also buying premium risk--i.e., the risk that the premium to NAV is going to fluctuate significantly, which can be a good thing at times and a bad thing at other times (depending upon what the premium was when you bought your shares).

My Mother has a good bit of silver that she took out of circulation in the early 1960s when 90% silver coins were no longer minted.  That silver has sat in a box for almost 50 years now, no commissions, no fees, no management expenses and no taxes.  As PM ETFs have soared in popularity I have often thought about how that box of silver coins, if they had instead been an equivalent number of shares of a fund like SLV, would have long since seen most of their value deteriorate in the form of fund fees and other expenses.

The PM ETFs can be a good tool, but I think it's important to remember that these ETFs are probably not suitable for long term holdings, not necessarily because they are scams, but simply because they are not consistent with the whole idea behind the PP, which is to place a certain amount of your wealth outside the boundaries (and associated risks) of the existing financial system.

[Gumby]

I like your idea to hold 13% physical.
I personally like GTU, the premium happens to be low right now, but the two main reasons I prefer GTU over any other gold fund are  the gold is allocated and also in a taxable account it is not taxed as a collectable when you fill out the proper paper work. To me these advantages make the premium risk worth it.

PFICs (Passive Foreign Investment Corporations) such as GTU, CEF and PHYS can be worth it, as long as the qualifications, circumstances and risks are fully understood.

Here's one analysis...

PFICs: Blessing or Curse?

For U.S. investors, there’s one more tax consideration if you own, or plan to own, a closed-end fund (whether it’s precious metals or otherwise).

For example, the Central Fund of Canada (which holds gold and silver bullion) is considered a Passive Foreign Investment Corporation (PFIC) for U.S. investors. This is a complex topic, but what I learned could save you some dinero now and some hassle later if you own a foreign closed-end fund like this one.

Keeping it simple, if you own CEF, you can qualify for the standard capital gains tax rates, instead of the 28% collectibles rate, if you file a timely and valid Qualified Electing Form, or QEF. There are several options you can take with a PFIC, but this is the most common election.

Even if you don’t sell the fund in any given year, you must file this form every year. If you don’t complete an annual QEF or make one of the other elections, you could get hosed when you eventually do sell because your gain will be considered ordinary income, forcing you to pay interest and penalties on top of the regular tax.

You can hold a PFIC stock for years without paying tax, but if you haven’t made a QEF or other election, you get the bad result we’re describing when you sell. Further, if the PFIC company reports income in a given year, this income is reportable and taxable as regular income that year, even if no stock was sold and even if the stock ended down on the year.

The point here is obvious: don’t blindly buy into a PFIC.

The QEF benefit is clear: you can cut your tax liability up to 46%, the difference between the 15% long-term capital gains rate and the 28% collectibles rate. Yes, capital gains rates are scheduled to rise next year, but this option still reduces your tax liability.

A successful investor is an informed investor, and you should read the prospectus of any closed-end fund before buying. And if you don’t want to mess with the tax hassle, use an ETF instead.

Source: Paying Taxes When You Sell Gold

and another... [quote] The IRS isn’t ... al to Boot[/quote]

And then of course Harry Browne would simply say that the biggest risk is that Gold funds are most likely to fail during a monetary crisis — when you actually need Gold the most.