ETFs vs Physical Metal? Why owning the real thing is better for you
Time and time again, Sophisticated investors and Investment Professionals alike cite three main reasons for physical bullion over metal ETFs (GLD, SLV):
Protection. Control. Tax Efficiency.
Protection
Real Assets are simply safer than paper substitutes. A precious metals IRA also gives you complete control You decide when to invest, how much, and when to sell. ETF’s have certainly stimulated investment demand for precious metals in recent years, and one can argue have helped to bring precious metals from the fringe into the mainstream as an investment class. On the surface, ETF’s are a way for investors to diversify their holdings into physical gold or silver, depending on the vehicle of choice.
Many individual investors have used these vehicles to diversify assets into bullion. As gold & silver become more mainstream, its investment options (ETFs) are coming under more scrutiny, and professional portfolio managers are realizing that gold/silver ETFs are not the only, nor the best way to diversify into physical bullion. In fact, they are commonly referred to as "bullion ETFs" even though their holdings may be some derivative form of bullion, rather than the real thing. To fully understand the risks you may be taking, be sure to READ the Prospectus. If you don't understand something, then seek out a professional who can explain it to you.
Download the GLD and SLV prospectus' and then make your own decision.
Download the GLD Prospectus here
Download the SLV Prospectus here
Control
The main arguement for owning physical metal vs ETF is one of control. As you read the prospectus you will find that you are giving up many rights. Owning physical bullion gives you complete control over what you do with it. As well, owning your bullion privately will ensure that it taken off the market. Much investment research includes holdings of ETFs in their supply of world inventories. Why?
Sprott's Embry warns investors to make sure ETFs backed by precious metals
Tax Efficiency
Generally, ETFs are appealing because they are a tax-efficient investment vehicle. There are some exlusions to this tax-efficiency including metals. Basically, the IRS considers an investment in a metals ETF inside a taxable account to be an investment in a "collectible". This means that it may be taxed as ordinary income as opposed to the more favorable Capital Gains tax rates, depending on whether the gain is considered short term or long term in nature. If you own these inside a taxable account, you may likely be subject to higher taxes on your gains. Consult your tax professional.
Now, you're probably saying, but I own these in my tax defered IRA, so do I owe the taxes? Again consult your tax professional. The interesting point to note is that generally, the IRS doesn't allow the category of "collectibles" to be held inside a retirement account. Generally an investment in a collectible by an IRA is considered to be a distribution in the amount invested on the day invested, subjecting it to tax on the gains, and a 10% early withdrawl penalty if taken before retirement age.
In 2007, the IRS created an exclusion for gold and silver ETFs allowing them to be held inside an IRA. See the full letters below:
IRS private letter ruling (gold) 2000732026, August 10th, 2007
IRS private letter ruling (silver) 2000732027, August 10th, 2007
IRS Publication 590, IRAs
IRA Metals stands ready to walk you through the process when you are ready to open an account an move from a precious metals ETF into a physical bullion IRA.