A Tax-Friendly Way to Own Gold

12/10/2008 12:21 pm EST


Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says commodities will bounce back, and he recommends a fund that gives you exposure—and favorable tax treatment.

Deflation is a low-probability outcome as the powers that be address the multifaceted crisis we are in. The more likely outcome is inflation. One thing that is not being stressed strongly enough is the possibility of good old-fashioned Weimar-style hyperinflation. Frankly, hyperinflation is what I fear the most and what is not being seriously considered.

An important aspect of the current credit crisis and an important reason that we will see higher commodity prices over the next several years is diminishing supply. The credit freeze also has ground most exploration and development projects to a halt. This lack of investment coupled with diminishing proven reserves and declining output is setting the stage for serious shortages in raw materials and energy.

The broad liquidation across all sectors this past summer has peaked. There will be continued panics for cash, but commodities will become more immune as time progresses.

I expect the next leg of the commodity bull to run strong for another three years. As this gets underway and investors see the money they are not making by being out of the commodity sector, they will stampede back into commodities. I think the October cash panic wrung any excesses and more out of them; and in most cases, we are looking at their nadir prices now.

Gold looks like the least risky place to be invested considering the growing crisis of confidence surrounding global financial markets and panic selling waves. We stand to win big in either a deflationary or inflationary environment with gold, although hyperinflation is the outcome with the greatest probability and profit potential.

If you already have gold in your portfolios, hang on tight. I firmly believe we will see new highs in gold next year. If you do not own gold, there has not been a better time in years to be a buyer.

I added Central Fund of Canada (NYSE: CEF) to our list on November 25th. The recommendation is to buy it at $9.50 or better with a sell stop at $7.99. (It closed above $9.00 Tuesday—Editor.)

We owned CEF previously and were stopped out. It is time to buy it back. This is a closed-end mutual fund, not an ETF. They hold physical gold and silver, and each share represents an equity ownership in that stash. There is no leverage involved. The fund currently holds 59.6% in gold and 37.0% in silver, plus a little cash.

The difference between this fund and ETFs like SPDR Gold Shares (NYSEArca: GLD) and iShares Silver Trust (NYSEArca: SLV) is that it is taxed as an equity investment rather than as a commodity investment. Gains and losses in commodity-based ETFs are taxed at a disadvantage to equities. Essentially, long-term gains in GLD and SLV are taxed at 28%, and gains in CEF should be [taxed at] about 15%.

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