What's the Best Way to Own Precious Metals?
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Precious metals have been a store of wealth for millennia. Owning coins, bars or jewelry used to be the only option to invest in gold, silver, platinum or palladium, but today’s investors have a number of alternatives. In addition to bars and coins, investors can also hold metals-backed exchange-traded funds (ETFs), closed-end funds, precious metals certificates and precious metals.
Bars and Coins
Bars and coins are the most direct way to hold precious metals. Government minted bars and coins like the American Gold Eagle or Canadian Maple Leaf have an assurance of purity and can be purchased through authorized dealers. However, when holding bullion directly, investors are responsible for its storage, insurance and ongoing costs. Bullion dealers charge a markup to your purchase price of coins and bars and buy them back at a discount. Bars and coins may not be easily traded, exchanged or redeemed.
For U.S. investors, the IRS considers precious metals to be collectibles in the class of art, rare books and fine wine. Provided you hold it for more than one year, for tax purposes, the long-term capital gains tax on your net gain from selling a collectible is 28%. This level of tax is considerably higher than the tax rate on most net capital gains, which is an average of 15% for most taxpayers, according to the IRS.1 If you sell a collectible in less than one year, the proceeds will be taxed as ordinary income.
Table 1. Bars and Coins
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Precious Metals Backed ETFs
Precious metals exchange traded portfolios are a popular way to gain exposure to metals without the inconvenience of storing and insuring the physical bullion. Exchange-Traded Funds (ETFs) and Closed-End Funds provide investors with access to physical bullion with the daily liquidity of an exchange-traded security.
Bullion ETFs
Bullion ETFs are open-ended funds that issue shares backed by metals. Investors do not have direct beneficial ownership of the bullion and do not have the option to exchange their shares for physical metal. While bullion ETFs mostly hold allocated metals, they also hold unallocated metals to facilitate the creation and redemption of shares.In the U.S., for tax purposes, bullion ETFs are considered collectibles by the IRS. ETFs holding precious metals are subject to the same tax treatment as ownership of precious metals coins or bars.
Table 2. Exchange Traded Bullion Funds
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| ETFs |
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Closed-End Bullion Funds
Closed-end bullion funds are similar to ETFs, but issue units through initial public offerings and follow-on offerings, units can be canceled through buybacks. The units are usually fully backed by allocated bullion. Since there are a fixed number of units at any given time, they may trade at a premium or a discount to their net asset value, depending on investor demand and whether there is an option to redeem for physical metal.
For some closed-end funds, such as the Sprott Physical Bullion Trusts, special U.S. federal income tax rules apply because they are defined as Passive Foreign Investment Corporations (PFICs) by the IRS. If a U.S. non-corporate holder makes a timely QEF election each year by filing IRS form 8621 with their federal income tax return, it will generally mitigate the otherwise adverse U.S. federal income tax consequences of owning precious metals via coins, bullion or ETFs. Capital gains will be taxed between 15% and 20%, depending on the holder’s specific personal situation.
Table 3. Closed-End Bullion Funds vs. Sprott Physical Bullion Trusts
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Pros | Cons |
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Closed-End Funds (without a physical redemption feature) |
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Sprott Physical Bullion Trusts (offers physical redemption) |
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* Subject to certain minimums. Lear more in How to Redeem.
** For more information, please see ”Tax Considerations-U.S. Federal Income Tax Considerations” in the Prospectus and always consult your tax accountant regarding your particular situation.
Precious Metals Certificates
Precious metals certificates are another way to gain exposure to gold or silver, but without the inconvenience of storing and insuring physical bullion. They are certificates of ownership of the precious metal and can be allocated (fully reserved) but in most cases are unallocated (pooled). Allocated certificates usually correspond to specific numbered bars, while unallocated certificates do not correspond to specific bars and do not provide direct beneficial ownership or title.
Precious metals certificates are essentially promissory notes — the issuer, a bullion bank, is promising to exchange them for bullion if requested, but investors do not own the bullion. There is no guarantee that there is a sufficient amount of bullion to back all of the certificates issued.
Bullion banks charge a premium over the spot price and certificates usually require larger minimum amounts such as 10 ounces of gold or 500 ounces of silver. Counterparty risk is a key consideration when investing in precious metals certificates. If the issuer of the certificate were to go bankrupt, you may become an unsecured creditor and you may not recover 100% of your investment.
In the U.S., for tax purposes precious metals certificates are considered collectibles by the IRS. The long-term capital gains tax on your net gain from selling a collectible is 28%.
Table 4. Precious Metals Certificates
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Digital Precious Metals
Several online marketplaces now allow investors to securely buy, sell and redeem digital assets backed by gold and other precious metals. These digital offerings usually strive to combine the key benefits of owning physical precious metals and the ease of blockchain-based technology. Investors should fully investigate whether the digital asset they are considering is 100% backed by the physical metal. While owning physical metals directly can be seen as cumbersome and risky, the digital option is often portrayed as a convenient, economical solution.
Investing in Precious Metals
Investors have a number of options for gaining exposure to precious metals — bars and coins, ETFs, closed-end funds, precious metals certificates and digital precious metals.
Bars and coins provide direct bullion ownership, but can be costly and inconvenient to buy and sell. Certificates are more convenient to hold but do not guarantee exchange for bullion and carry counterparty risk. ETFs are liquid and cost effective but do not offer beneficial bullion ownership and cannot be redeemed for metal.
We believe that closed-end funds with physical redemption features, such as the Sprott Physical Bullion Trusts offer a great way to gain exposure to precious metals. They have the liquidity, convenience and cost efficiency of exchange-traded funds along with a number of compelling advantages which include the ability to redeem for physical metal,2 the potential for more favorable tax treatment for U.S. investors3 and lower counterparty risk by not storing the metals with a non-corporate U.S. bullion bank.
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1 |
Source: How Collectibles are Taxed, https://www.investopedia.com/articles/personal-finance/061715/how-are-collectibles-taxed.asp |
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Subject to certain minimums. |
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3 |
For more information, please see ”Tax Considerations-U.S. Federal Income Tax Considerations” in the Prospectus and always consult your tax accountant regarding your particular situation. |
†The Trusts are closed-end funds established under the laws of the Province of Ontario in Canada and are available to U.S. investors by way of listings on the NYSE Arca pursuant to the U.S. Securities Exchange Act of 1934. The Trusts are not registered as investment companies under the U.S. Investment Company Act of 1940.
Important Dislosures
Sprott Physical Bullion Trusts
Sprott Physical Bullion Trusts (the “Trusts”) are closed-end funds established under the laws of the Province of Ontario in Canada. The Trusts are available to U.S. investors by way of listing on the NYSE Arca pursuant to the U.S. Securities Exchange Act of 1934. The Trusts are not registered as investment companies under the U.S. Investment Company Act of 1940.
The Trusts are generally exposed to multiple risks that have been both identified and described in each Fund’s prospectus, which can be found here: Sprott Physical Gold Trust, Sprott Physical Silver Trust, Sprott Physical Gold and Silver Trust and Sprott Physical Platinum and Palladium Trust.
Please refer to each Fund’s prospectus for a description of these risks. Relative to other sectors, precious metals and natural resources investments have higher headline risk and are more sensitive to changes in economic data, political or regulatory events, and underlying commodity price fluctuations. Risks related to extraction, storage, and liquidity should also be considered.
Gold and precious metals are referred to with terms of art like store of value, safe haven, and safe asset. These terms should not be construed to guarantee any form of investment safety. While “safe” assets like gold, Treasuries, money market funds, and cash generally do not carry a high risk of loss relative to other asset classes, any asset may lose value, which may involve the complete loss of invested principal.
All data is in U.S. dollars unless otherwise noted.
Past performance is not an indication of future results. The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on their specific circumstances before taking any action. Sprott Asset Management LP is the investment manager to the Trusts. Important information about the Trusts, including the investment objectives and strategies, applicable management fees, and expenses, is contained in each Fund’s prospectus. Please read the prospectus carefully before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or operational charges or income taxes payable by any unitholder that would have reduced returns. You will usually pay brokerage fees to your dealer if you purchase or sell units of the Trusts on the Toronto Stock Exchange (“TSX”) or the New York Stock Exchange (“NYSE”). If the units are purchased or sold on the TSX or the NYSE, investors may pay more than the current net asset value when buying units of the Trusts and may receive less than the current net asset value when selling them. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized.