How to Effectively Buy Physical Gold Without High Premiums

By MBA, CFP® - Chief Executive Officer, Vernon C. Sumnicht on April 7, 2020

With the current Covid-19 issues exacerbated by the central bankers (Federal Reserve) and government fiscal responses, causing various liquidity concerns, we are seeing many market mispricing anomalies. One of those anomalies (without getting into the details) has resulted in unusually high premiums for physical (bars and coins) precious metals. As an example, today (4/5/2020,) Kitco reports world spot gold at $1,622 per ounce, while APMEX is selling 1-ounce American gold eagle coins for $1,830 each (for purchase of 1-9 coins). That works out to approximately a 13% premium for the 1-ounce gold coin over the spot market price of gold. This doesn’t include the fact that many states are requiring dealers to withhold state and local taxes on sales of physical precious metals. In the state of Wisconsin (for example) that’s 5%, which means each gold eagle will cost $299.50 over spot gold price or about an 18.5% premium.

The basic strategy for purchasing physical precious metals (bars or coins) when premiums are high is simple … wait until premiums come back down to normal. However, current buyers of physical precious metals are concerned that precious metals prices will go much higher based on the current economic, fiscal and/or monetary environment. Therefore, despite the unusually large premiums, demand remains high and waiting to buy appears to be an imprudent option. There is the option to wait for lower physical premiums by purchasing “paper gold” like ETF’s that own precious metals bullion and still participate in any precious metals price appreciation. However, this doesn’t necessarily mean you directly own physical precious metals. Some of the physical precious metals owned by ETF’s are “unallocated” bars of metal. Unallocated means you own an undefined share in a deposit of bullion at a custodian bullion bank. Unfortunately, this creates counterparty risk in the event of bankruptcy or insolvency of the custodian bank.

A solution to the potential risk of ETF’s that own unallocated precious metals bullion is to purchase Canadian closed-end bullion funds that are similar to ETFs, but issue units through initial public offerings that are traded on US exchanges. The units you own are fully backed by allocated bullion. Allocated precious metals bullion means the fund has specific bars of precious metals, identified by serial numbers that are custodied at a bullion bank.  In this case there is no counterparty risk in the event of bankruptcy or insolvency of the custodian bank. Therefore, by purchasing closed-end bullion funds you can purchase precious metals at spot market price, actually be assured you own physical precious metals and avoid paying the unusually high current premium.

Other possible advantages of closed-end bullion funds

  • Liquid convenient – easy to buy and sell
  • Cost effective
  • Fully allocated metal
  • Redeemable for physical metals (read the fund prospectus carefully for volume minimums and costs)
  • Potential tax advantage for non-corporate U.S. investors if held more than 1 year – 15% or 20% capital gain tax rate versus collectable rates of 28%
  • Able to purchase in small dollar amounts

One thing you may want to check before buying closed-end bullion funds       

  • They can trade at a discount or premium to net asset value, but the discount is typically reduced due to physical metal redemption feature

Can iSectors® Help an Advisor Invest in Gold?

Many advisors have taken advantaged of separately managed accounts (SMA) that provide specialized investment management for client accounts. It is even more important to find a liquid alternatives investment manager that specializes in precious metals. The iSectors Precious Metals Allocation is a unique SMA bullion fund solution for advisors’ clients.

The iSectors Precious Metals Allocation has the following advantages compared to other strategies:

  • Optimally diversified allocation invested in gold, silver, platinum, and palladium bullion funds
  • Securities owned take advantage of the passive foreign investment company provision, if it is worthwhile for high income taxpayers
  • Invests in the most cost-efficient funds considering both expense ratio and capital gain taxation

For more information about liquid alternatives including gold and other bullion funds, please download 5 Valuable Liquid Alternative Solutions for A Down Market from our website. The book includes a chapter discussing precious metals investments in greater detail.

If you are a financial advisor that wishes to learn more about properly diversifying allocations using precious metals, please contact Scott Jones at 800-869-5184 or [email protected].  Alternatively, you may wish to register on our website to review information on the iSectors Precious Metals Allocation.

Individual investors can contact Scott Jones for a referral to a recommended iSectors advisor that can help them determine the best iSectors asset allocation for their portfolios.


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