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Asset Allocation of Gold or Silver
Old 09-11-2010, 01:49 PM   #1
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Asset Allocation of Gold or Silver

I have been thinking about diversifying 5% to 10% of my assets into hard metals, primarily focussing on silver. I am thinking of doing this as a hedge against inflation. Should I buy coins, bullion, an ETF or a silver company? Has anyone else been having the same thoughts, or am I too late with the runnup in metal prices?
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Old 09-11-2010, 01:52 PM   #2
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The more uncorrellated classes you hold, the more stable the portfolio value.

I own Permanent Portfolio PRPFX which is 25% gold and 5% silver, it holds gold bullion and silver coins.
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Old 09-11-2010, 08:19 PM   #3
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No, you are not alone. Silver probably has more of an upside than gold at present. I hold ~2% in gold & silver certificates (which I store in a safety deposit box at the bank) as well as another ~2% in gold and other mining stocks. No bullion.
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Old 09-11-2010, 08:27 PM   #4
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I'm sitting with a bunch of PCRIX
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Old 09-11-2010, 09:15 PM   #5
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I have been pondering the same questions as the OP. There are a few reasonable options to buy gold bullion in ETF market (e.g. GLD and SGOL), but is there anything comparable for silver?
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Old 09-11-2010, 09:23 PM   #6
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I have been pondering the same questions as the OP. There are a few reasonable options to buy gold bullion in ETF market (e.g. GLD and SGOL), but is there anything comparable for silver?
Check out SLV.
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Old 09-12-2010, 11:19 AM   #7
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Several thoughts.
  • Read the ETF disclosures carefully and Google their analysis. You’ll find, most but not all, don’t have to hold physical bullion and their depository system is not auditable. So be warned that they may be paper backed funds.
  • Physical AG or AU can be bars, coins, wafers or coins. All but the US coins can be taxed when you sell, at the commodity tax rates, currently higher than long term capitol gains. The US coins are considered currency and are not taxed. All can be held within an IRA, you just have to find the proper metal broker to do it. And it costs.
  • If you get anything but coins, be careful. Make sure they are commercially tradable. You do not want to have to assay them to sell them. This could cost 30% of their value just to prove their validity.
  • Many consider silver a poor mans gold. It doesn’t cost as much. Last time, if I remember correctly, silver hit $50/oz. Currently gold is hitting its historical highs.
  • The mining stocks will generally lag metals in price changes. They tend to rise in the later part of any metals boom.
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Old 09-12-2010, 12:48 PM   #8
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Currently gold is hitting its historical highs.
Only in current dollar terms. It's a long way from its historic high in real terms.

Personally, I keep 3-5% in GLD and PPLT (platinum), and that works fine for me.
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Old 09-12-2010, 01:05 PM   #9
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CEF - Central Fund of Canada - is a closed end fund that invests in gold & silver, with a 50 - 1 ratio of ounces of silver to gold. It usually sells at a premium at the high single digits, but US owners pay regular capital gains tax rates.
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Old 09-12-2010, 03:24 PM   #10
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Actually the tax situation with CEF and GTU (the gold-only closed-end fund run by the same outfit) is more complicated than that, Michael - something I only learned after buying it.

The best article by far on the pros and cons of the various ways to invest in gold I have seen is here:

Casey Research Rundown on Gold ETFs | Crawling Road

I invest in the Permanent Portfolio myself, but the real allocation as recommended by Harry Browne, not the PPRFX mutual fund which deviates substantially from Browne's forumula, has a high expense ratio, is more volatile and has significantly underperformed the PP allocation (which is 25%
gold, preferably physical bullion, 25% Total Stock Market, 25% Long Term Treasuries and 25% Treasury Money Market Fund).

The Casey article I provided the link to discusses PHYS, another way to hold gold, and the Crawling Road blog is the single best source of info on the Permanent Portfolio and has much more on gold if you poke around.

Personally I've used GTU and physical gold held at Bullionvault.com and have been happy with both, but would choose gold coins or the like if I had it to do over. As discusssed on the aforementioned blogs and elsewhere silver does not have the unique properties that gold does as both a reserve currency and precious metal and does not offer the protection in a crisis that gold does (and I should make it clear that I am not a gold bug - don't really care about the stuff - and the PP doesn't either). As a part of the PP it make sense - otherwise, for most people, probably not. The performance of the PP is impossible to argue with, that's for sure.
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Old 09-12-2010, 03:50 PM   #11
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Actually the tax situation with CEF and GTU (the gold-only closed-end fund run by the same outfit) is more complicated than that, Michael - something I only learned after buying it.
CEF is taxed as a normal closed-end fund. What do you mean by "more complicated"?
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Old 09-12-2010, 04:17 PM   #12
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Hi Michael,

Here's the relevant section from the Casey Research article:

"Thereís one more tax consideration if you own, or plan to own, CEF or PHYS.

The Central Fund of Canada and the Sprott Physical Gold Trust are Passive Foreign Investment Corporations (PFICs) 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 these.

Keeping it simple, if you own CEF or PHYS 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 donít sell the fund in any given year, you must file this form every year. If you donít 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 havenít made a QEF or other election, you get the bad result weíre 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: donít blindly buy into a PFIC.

The QEF benefit is obvious: 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.

The successful investor is the informed investor, and you should read the prospectus of PHYS or CEF before buying. And if you donít want to mess with the tax hassle, use an ETF instead."

So my comment - and I apologize for not being more clear - was that owning these funds is more complicated in terms of tax reporting than GLD or other ETFS (which I personally wouldn't touch with a 10 foot pole) or owning actual bullion or coins, which are the best and lowest cost choice over the long run, provided you don't do much selling [due to 28% collectibles tax rate). These complexities and hassles are the kind of thing that drive some to avoid gold or buy into funds like PPRFX but IMHO it is worth the homework.
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Old 09-12-2010, 06:36 PM   #13
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kevink, my experience at fidelity is they treat CEF as a "deemed sale" election and record all proceeds as capital gains depending on the period. This is confirmed by experiences others have shared (not at this forum).
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Old 09-12-2010, 07:03 PM   #14
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Hi Michael,

I will look into this. Haven't sold any shares yet. The point is though these are Canadian closed end funds and that is why the PFIC form has to be filed. Could be that Fidelity is unaware of this - they are fairly esoteric funds - but the IRS won't be coming after them
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Old 09-14-2010, 02:47 PM   #15
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I'm sitting with a bunch of PCRIX
dam...nice work- minimum investment is $5,000,000
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Old 09-14-2010, 02:52 PM   #16
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dam...nice work- minimum investment is $5,000,000
Check PCRDX (same fund as PCRIX, with a $1,000 mimimum but a higher ER).

Disclosure: I own that fund.
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Old 09-14-2010, 04:44 PM   #17
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dam...nice work- minimum investment is $5,000,000
What - doesn't everyone around here have that much for their commodities allocation?

You can get into PCRIX for $25K at Vanguard.
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Old 12-14-2010, 09:10 PM   #18
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One of the easiest ways to own large quantities of gold, with relatively very little risk, is the Harry Browne 25/25/25/25 Permanent Portfolio. Here's a chart that shows values of the portfolio adjusted for inflation and dividends reinvested:



PRPFX offers a similar return but with a bit more volatility and higher expenses.
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