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XMFSinchiruna (26.55)

How to get PHYSical with Gold



June 01, 2010 – Comments (9) | RELATED TICKERS: CEF , GLD

Special thanks to all Fools who contributed to the prior discussion of the tax implications for U.S. investors in closed-end bullion funds like PHYS, as those discussions ultimately prompted this article to bring these important considerations to a wider audience.

How to Get Physical With Gold


Regarding GLD:  "In the midst of all that growth, however, revelations about the degree of leverage built into the London paper gold market has raised concern among many gold investors regarding the sanctity of reported gold holdings. Meanwhile, the fact that the fund's custodian -- HSBC (NYSE: HBC) -- is one of two bullion banks alleged by the Gold Antitrust Action Committee (GATA) to have held dominant, market-making positions on the COMEX futures exchange, leads to a natural curiosity regarding potential conflicts of interest."

"Into this boiling sea of uncertainty, Sprott Asset Management launched the Sprott Physical Gold Trust ETV (NYSE: PHYS) in March. Offering the reassuring option of redeeming units for actual physical gold, and coming as it does from a firm that has been an outspoken critic of the alleged price manipulation by the bullion banks, the Sprott Physical Gold Trust ETV (let's call it PHYS) joins a short list of vehicles that I have highlighted for investors seeking the greatest possible assurance of exposure to unencumbered, actual, physical bullion."

"If these complex issues surrounding the bullion proxies have you wondering whether they are worth the peace of mind that comes with exposure to a safe haven, rest assured that you are not alone. Although I view bullion exposure as a critical element of a well-balanced strategy for precious-metals allocation, I feel that quality mining companies are too often overlooked by those investors who may be looking to gold or silver for the first time in their investing experience."

If you enjoy the article, please be sure to rec at the source. :)





9 Comments – Post Your Own

#1) On June 01, 2010 at 5:08 PM, XMFSinchiruna (26.55) wrote:

Maybe this will help Fools feel better about the portion of capital gains that must be shared with Uncle Sam:

Gold to $10,000?

Peter Schiff, president and chief global strategist at Euro Pacific Capital thinks gold could reach US$5,000 to US$10,000 per ounce in the next five to ten years.

“People are afraid of the debasement of all the currencies,” he told BusinessWeek. “What’s surprising is that gold is still as low as it is.”

When benchmarked against the CPI, money supply and GDP, there is no doubt that gold can easily double from here, according to David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates.

“Demand is always difficult to forecast, especially for jewellery, but we do know that central banks have very deep pockets and bought more gold last year (425 tons) than at any other time since 1964,” he said in a note.

Mr. Rosenberg also noted that the supply backdrop is highly supportive of a sustained bull market, with mined production failing to climb in the past decade. In fact, it has fallen in five of the past eight years.

He added: “And, we know what the marginal cost curve is doing because there is so little cheap supply left in the ground that gold companies now have to drill as much as 2.3 miles to get to the yellow metal in South Africa (and all Bernanke has to do is press a button).”

Read more:


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#2) On June 02, 2010 at 10:50 PM, Marty1a (< 20) wrote:

With all of the talk about gold lately, I keep seeing recommendations for CEF (Central Fund of Canada) as one of the better ways to hold shares of gold & silver backed by real bullion.

However, I am now digging deeper (after purchasing it, doh!) and have found several posts warning about the complexities of holding this fund in a US taxable account, due to it's Passive Foreign Investment Company (PFIC) classification.  I have asked a tax advisor about this and he didn't know the answer.  I've seen the most complete answers on the Yahoo! message boards for CEF, but would be really grateful if someone (perhaps TMF) could attempt to explain this situation in clear detail.

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#3) On June 03, 2010 at 8:39 AM, XMFSinchiruna (26.55) wrote:


That's precisely what the above article does. Please do not be overly alarmed, as this is a matter you can certainly adapt to. The good news is you became aware of the tax treatment during the same year you purchased the shares, so you will still be able to make a timely "QEF election" and thereby lock in the lower 15% capital gains rate.

The discussion of PHYS below is directly exchangeable with CEF, as they are both considered passive foreign investments and therefore have the same tax treatment.

"The PHYS is classified by the IRS as a Passive Foreign Investment Company (PFIC), and as such the company informs investors that they may be well-advised to file form 8621 to make a "QEF election." Provided such election is properly made, [long-term] capital gains from the sale of PHYS units would then ostensibly be taxed at the rate of just 15%."

This website has some further information: I have bolded a portion of the text that may provide some solace. Although the form may be extensive and the instructions confusing, we may find that making a QEF election in the case of CEF and PHYS may actually be rather simple.

The IRS estimate of the time required to prepare this form is about seven hours, exclusive of the time required to learn about the form and the time required for record keeping throughout the year.  The actual time will depend on the election made by the taxpayer. Reporting income using the mark-to-market method doesn't take very long. Reporting income using the QEF election might take seven hours (or more) depending on how the information is provided by the PFIC. If the PFIC makes cash distributions that do not exceed 125% of the average distributions in the three previous years, it may only take a few minutes to prepare the form. Where the form is used to compute the tax on an excess distribution, it could take much longer than seven hours to prepare the form.

Finally, let me say this. Stay tuned to this blog on the matter. We are all working together to wrap our heads around these complex tax treatments by the IRS, and we will undoubtedly band together to figure out the specifics when the next filing time approaches.

Let me know if you have further questions. The form must be filed each year that one holds the shares in order to maintain the QEF election and retain the normal 15% LT capital gains tax rate.

The value of having trustworthy exposure to gold and silver bullion, in my opinion, outweighs even this notable inconvenience that comes courtesy of the IRS.

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#4) On June 03, 2010 at 8:58 AM, XMFSinchiruna (26.55) wrote:

Here is the link to IRS form 8621.

And here are the instructions, although I would supplement those instructions with outside specific guidance (as from the website linked above) relating to the case in question.

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#5) On June 03, 2010 at 9:41 AM, Marty1a (< 20) wrote:

Thanks for the info--I read through the posts from the above link and the info seems fairly straightforward if you fill out the form in the year of purchase.  Unfortunately, I purchased a small amount of shares last year and did not know about the form and hence did not fill it out (seems strange that common tax software would not point out this situation).  A $10K fine for not filling out this form compared to my small amount of this fund seems excessive (as does a $500-$1000 tab for getting tax service to re-file).  I will stay tuned to these blogs and cross my fingers for a solution, as I really like all of the other aspects of using these funds.

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#6) On June 03, 2010 at 11:11 AM, silverminer (30.05) wrote:


The oddity of this situation, as one fellow Fool pointed out in a previous discussion, is that not even the IRS is clear on how investors should file for these. They have not issued a determination on the issue. Since the IRS specifically encourages taxpayers to utilize popular software systems for online filing, and identifies them by name, this brings up an interesting legal situation if those software systems fail to include support for this particular situation.

I am not qualified to discuss the specifics of how to proceed in the case of a missed filing, but hopefully your accountant will be able to guide you. At least one other Fool is preparing to amend his filing with a form 8621, and I will post anything he relates to me/us on the issue. He may also have prompted a determination from the IRS on the issue.

I don't know that any fines would result from a failure to file form 8621, but here again I am no tax expert ... according to my layman's understanding, the only outcome of failure to file would be a higher capital gains rate on realized gains. If anyone out there has information to the contrary, please share.


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#7) On June 03, 2010 at 11:11 AM, silverminer (30.05) wrote:

silverminer = TMFSinchiruna  :)

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#8) On June 03, 2010 at 10:31 PM, mhy729 (30.30) wrote:

Dear TMFSinchiruna,

Just wanted to drop by to acknowledge the excellent series of comments you made here...

One Stock That's Better Than Gold

...and to thank you for your tireless efforts here at TMF!  :D

- Marcus

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#9) On June 04, 2010 at 9:50 AM, XMFSinchiruna (26.55) wrote:


Thank you. I'm glad you found that discussion helpful. It certainly was no simple undertaking. ;) I plan on reposting portions of it sometime soon to reach a wider audience.

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