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The Comparison of Owning Physical Precious Metals versus Paper Certificates


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 Registered Investment Advisor:



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
         



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



Additional Negative Considerations on Precious Metals ETF's

 from Jim Willie CB, editor of The Hat Trick Letter, February, 2007 issue at:

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"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."

 



Gold at 1.3% Over Cost and Silver at 1.7% Over Cost