Gyroscopic Investing

Hello PP'ers
    I am a long time lurker (2 years) and this is my first post.  I have implemented PP and it's doing well this year.

    My question is about gold taxation.  I don't like paying collectibles rate on it so I was looking at other ways.  Some sites online ( http://www.investmentnews.com/article/2 ... o-own-gold ) suggest that options on gold funds (GLD, IAU, etc.) are treated as 1256 contracts and the tax on them is around 23% instead of 28%.

    I was thinking of selling GLD and buying options for next year.  Buying ATM call and selling ATM put is effectively equivalent to owning the underlying (there are minor differences like having to navigate two bid-ask spreads instead of 1, paying commission for 2 trades instead of 1).

    Has anybody done this or given it any thought?  Does it actually work?

thanks,
-Jay

JayT wrote: Buying ATM call and selling ATM put is effectively equivalent to owning the underlying (there are minor differences like having to navigate two bid-ask spreads instead of 1, paying commission for 2 trades instead of 1).

There are other reasons to own gold than its price movement - in particular gold you own in physical form is uniquely yours with no counterparty risk.  If you buy an at-the-market call and sell a put you effectively don't own anything but counterpary risk.  I don't know if Browne ever commented on this particular strategy, but it's not hard to imagine he would have strongly disapproved. 

If you're chiefly concerned about taxes, you might consider the Canadian closed end gold funds, GTU and PHYS.  If you file the right paperwork (form 8621) each year you own these, you can end up paying long term capital gains rather than the collectibles tax.  These funds don't track the price of gold as closely as the ETFs, but they're far simpler beasts as well (each share corresponds to a particular amount of the gold the fund has and trades for whatever anyone is willing to pay for it - this is conceptually similar to the ETFs, but the number of shares and the amount of gold the ETFs have changes constantly).

Rickb, that's a good point about counter-party risk.  I had casually looked at 8621 before and thought it was too complex for me.  I think I need to look at it a bit more in depth.

Thanks.

JayT wrote: Rickb, that's a good point about counter-party risk.  I had casually looked at 8621 before and thought it was too complex for me.  I think I need to look at it a bit more in depth.

Thanks.

The 8621 isn't that complicated, although it is very annoying to have to give all that information to you-know-who.

This also applies to CEF (Central Fund of Canada), which is about 50-50 gold and silver, if you like wild swings in price. That fund also has much more volume and smaller spreads on average than GTU, so it's easier to buy and sell without worrying about getting killed on the spread.