Sprott Physical Bullion Trusts The Best Way to Own Precious Metals?

DOWNLOAD PDF VERSION: What's the Best Way to Own Precious Metals?

Bars & Coins

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, they can also hold metals-backed exchange-traded funds (ETFs), closed-end funds, precious metals certificates and digital 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 a guarantee of purity and can be purchased through authorized dealers. However, when holding bullion directly, investors are responsible for its storage and insurance and their ongoing costs. Bullion dealers charge a mark-up 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.

Pros Cons
  • Direct ownership of bullion
  • Able to purchase in small dollar amounts
  • Mark-ups to spot prices when buying; mark-downs when selling
  • Inconvenient to buy and sell
  • Responsible for storage, insurance and ongoing related costs
  • In the U.S., taxed as a collectible at 28% if held more than 1 year


Precious Metals Backed Exchange-Traded Portfolios

Precious metals exchange-traded portfolios are a popular way to gain exposure to precious 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.

Exchange Traded Bullion Funds

Exchange traded bullion funds are open-ended funds that issue shares backed by metals. Investors do not have direct beneficial ownership of the bullion and have no option to exchange their shares for physical metal. If investor demand outpaces available shares on a given trading day, the ETF will issue more shares to satisfy the demand and acquire more metal with the proceeds. Conversely, when there are more investors selling than buying, the ETF will redeem shares and sell the equivalent value of metal.

While bullion ETFs mostly hold allocated metals, they also hold unallocated metals to facilitate the creation and redemption of shares. In addition, the custodian that stores the metal is typically a bullion bank, which can create counter-party risk in the event of bankruptcy or insolvency.

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.

ETF Pros ETF Cons
  • Liquid
  • Convenient – easy to buy and sell
  • Cost effective
  • Typically trades at net asset value
  • Able to purchase in small dollar amounts
  • Cannot be redeemed for bullion
  • Can hold futures contracts, certificates and unallocated metals
  • Counterparty risk – bullion bank
  • In the U.S., taxed as a collectible at 28% if held more than 1 year

Closed-End Bullion Funds

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 his or her 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.

Closed-End Funds (without a physical redemption feature)
  • Liquid
  • Convenient – easy to buy and sell
  • Cost effective
  • Potential tax advantage for non-corporate U.S. investors if held more than 1 year – 15% or 20% long-term capital gains tax rate
  • Able to purchase in small dollar amounts
  • Can trade at a significant discount/premium to net asset value
  • Counterparty risk – bullion bank
  • May hold unallocated precious metals certificates
Sprott Physical Bullion Trusts (offers physical redemption)
  • Liquid
  • Convenient – easy to buy and sell
  • Cost effective
  • Fully allocated metal only
  • Redeemable for physical metals*
  • Lower counterparty risk – storage with Crown Corporation of the Government of Canada
  • Potential tax advantage for non-corporate U.S. investors if held more than 1 year – 15% or 20% long-term capital gains tax rate**
  • Able to purchase in small dollar amounts
  • Can trade at a discount/premium to net asset value but the discount is typically reduced due to physical metal redemption feature

Precious Metals Certificates

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 10oz of gold or 500oz 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%.

  • No responsibility to arrange for storage and insurance
  • Lower mark-ups to acquire
  • Do not always guarantee exchange for bullion
  • Counterparty risk of issuer
  • No direct ownership
  • Not able to purchase in small dollar amounts
  • In the U.S., taxed as collectibles at 28% if held more than 1 year


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.

1 Source: How Are Collectibles Taxed? | https://www.investopedia.com/articles/personal-finance/061715/how-are-collectibles-taxed.asp
* Subject to certain minimums.
** 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.



Sprott Physical Bullion Trusts

Sprott Asset Management LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the prospectus carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.

The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing. 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 or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction. 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, the rendering or 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.

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