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How to Invest in, Buy, Sell, Store and Insure Precious Metals in Canada (2/4)
Category :- Investments

Author :- Art Smith 
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Posted on April 3, 2014, 3:38 am
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2.2 Physical precious metals that are registered on your name

Physical precious metals that are registered on your name may or may not be physically delivered to you, depending on the investment option you have chosen.

These options include:
-Trusts (section 2.2.1);
-Investment through companies that buy/sell and store precious metals for you (section 2.2.2);
-Deposit programs (section 2.2.3). 

2.2.1 Precious Metals Trusts

  Trust is a convenient and low-cost way to invest in physical silver, gold, platinum or palladium bullions, and it provides secure storage of physically segregated bullions. Investors can hold an interest in these precious metals by buying units of the Fund directly on the Toronto Stock Exchange. Units of many Trusts can be redeemed for actual physical bullions (subject to minimum redemption amount). Precious Metal Trusts may be held in Registered programs.

  Some Precious Metals Trusts traded in Canada are Sprott Physical Gold TrustSprott Physical Silver TrustSprott Physical Platinum and Palladium TrustBrompton Precious Metals Trust. Precious Metals Trusts traded in USA are, among others, SPDR Gold Shares Trust (symbol GLD) and iShares Silver Trust ETF (symbol SLV). However, these 2 trusts do not physically deliver precious metals and many people believe that they do not actually have all the precious metals they sell units for. There are many other similar trusts but GLD and SLV are the biggest of all for gold and silver, respectively.

One of the US trusts that is traded on the US stock exchange and can deliver physical gold to your door (including Canada) is Merk Gold Trust.

This fund is good for you if you want to avoid wire transfers when buying or selling gold, if you generally buy in small quantities, if you like the option of taking physical delivery in the form of coins or if you want to own ETF that contains audited gold.

Taking possession in OUNZ does not trigger a tax event as you are simply taking possession of what you already own. Please refer to this site for the investment prospectus.

In addition to privately managed trusts, the Royal Canadian Mint has recently started an Exchange Traded Receipts (ETR) Program that allows you to invest in gold and silver. Silver ETRs are listed on the Toronto Stock Exchange and traded in Canadian and U.S. dollars under the symbols MNS and MNS.U, respectively. Gold ETRs are listed on the Toronto Stock Exchange and traded in Canadian and U.S. dollars under the symbols MNT and MNT.U, respectively. To quote the Royal Canadian Mint (date of access: March 2014): “We do not offer units or shares in a trust, Exchange Traded Fund (ETF), or mutual fund. We offer ETRs which represent a direct beneficial ownership in physical silver held by the Mint. <...> ETRs may be redeemed at the option of the ETR holder for physical silver bullion or cash on a monthly basis. <...> The Royal Canadian Mint believes that the ETRs are competitive in respect of purity, costs and redemption features. <...> Each ETR represents an undivided beneficial interest in physical silver bullion entitling the holder thereof to physical silver bullion with a minimum purity of 99.9%.” Note that these ETRs have very thin trading volume and might be illiquid if/when you decide to sell them.

2.2.2 Companies that buy, sell and store physical precious metals for you

It make most sense to discuss companies offering these services by 3 types of storage services: segregated allocated, unsegregated allocated and unsegregated physical backed storage types.

Segregated Allocated (or segregated) storage

  Specific coins and bars (which include serial numbers) are physically segregated, stored and registered in your name. With segregated storage, the investor owns specific bars and coins and can take physical delivery upon request. This is the most secure form of storage.

There are several very reputable companies that buy/sell and store metals for you. For example, Kitco (one of the biggest private precious metals companies in Canada) has its popular Canadian Allocated Storage program. This program allows you to purchase precious metals from Kitco and have them stored on a segregated allocated basis in highly secure storage facilities in Canada. Canadian Allocated Storage account holders can add to their precious metal holdings, sell off all or part of the holding or withdraw their holdings at any time.

The following reputable companies can store metals on segregated allocated basis in a country of your choice:

www.Goldmoney.com
www.BullionVault.com
www.HardAssetsAlliance.com
www.BMGbullionbars.com


  Each company from this list has its own unique benefits and none is better than the other. BMGbullionbars.com is the only company from the above list that is approved for registered plans and it is located in Canada.

Unsegregated Allocated (or allocated) storage

Physically segregated gold/silver (usually in bar form) is registered in the name of the storage service provider. Investors do not own specific bullions/bars; the bars are generic and the investors own part of the pool of the precious metals, based on money invested. Central Fund of Canada (Symbols: CAD CEF.A and USD CEF.U) and Bullion Management Group (BMG) are examples of companies offering unsegregated allocated storage. Both CEF and BMG Funds can be held in Registered programs.

When you buy CEF shares you invest in approximately 40% silver and 60% gold. Since CEF shares are traded on stock exchange, they can be traded with a discount (i.e. cheaper) or with a premium (more expensively) to the assets the fund holds. The bigger the discount the better value you get for your money. Click here to see the exact breakdown of the CEF assets and whether the shares are traded with a discount or a premium. 

  From our experience, if CEF shares are traded with a very high (about 10% or higher) premium, the precious metals market is close to a top and precious metal prices will go down soon. This is a very good investor sentiment indicator. However, note that if the fund is traded with a significant discount it does not necessarily mean that the market is near a bottom; trading with a significant discount can last for a long period of time, without the market reaching the bottom.

Finally, note that CEF claims to be a segregated and allocated storage fund; however, shares cannot be redeemed for physical metals and this is the reason why it is included in the unsegregated allocated category in this report.

BMG Funds are all open-end mutual funds that provide a low cost option of owning precious metals bullions/bars. You cannot take delivery of your gold and silver if you invest in BMG funds. BMG has a gold fund (BMG Gold Advantage Return BullionFund) that even pays dividends. We have tried to investigate where this BMG gold fund gets income that pays dividends, but the company did not answer our email query.

Unsegregated Physical Backed (or unallocated) storage

  Unallocated investment is an unsecured claim on a provider where the claim is 100% backed by physical metals in various forms. As a result, your investment is subject to the storage company's default risk. This is the least secure and the least desirable form of storage. Examples would be gold or silver certificates sold by banks. Most stock brokers and banks offer these gold and silver certificates. They are a much cheaper way to invest in gold and silver because the premium is cheaper on certificates than on physical bullions.

One obvious disadvantage of this type of storage is that you might not always be able to take delivery of your gold/silver, since the storage is unallocated and there are no safekeeping charges or insurance fees. In most cases, you have exposure to the price of the metals and not to the physical metals themselves. The majority of gold and silver certificates are in a sense promissory notes: i.e. the bank is promising that it will trade these certificates for physical metals upon your request. Since it is merely a promise, it does not guarantee that this is what will necessarily happen.

This is the exact quote taken from one of the Canadian bank’s precious metals certificates description: “…you have the option of redeeming for cash or a conversion into physical bars <...> based on availability”. It is not exactly clear how you can own something which you will receive only if it turns out to be available.

ScotiaMcLeod offers the RSP Gold Certificate where gold is allocated to the investor. The site does not specify if there is any storage fee (we believe that there are no fees implying that the storage is nevertheless unallocated).

Some Comments and Personal Recommendations (all storage types):

  It would be a good idea to invest only with companies that will deliver your precious metals upon your request.

Consider investing only when metals are stored in a Segregated Allocated account. If you do not pay an annual storage fee (at the very least) then your account is most likely not Segregated Allocated. If you hold bullions in your Segregated Allocated account you should be given serial numbers, the exact weight and fineness of the bullions that are allocated to you.

It might be a good idea to store precious metals outside your country of residence if you can afford it, in case you need to leave the country.

Finally, note that Royal Canadian Mint storage is more reputable than any bank storage facility.

2.2.3 Deposit Programs

 Deposit programs allow banks to store precious metals on your behalf. Some exaples are discussed below.

The BMO Gold (or Silver) Deposit Program allows you to buy gold (or silver) which can be delivered to you or stored at a third party storage facility (which is not disclosed) approved by BMO Nesbitt Burns. Based on BMO site information, this gold (or silver) is allocated to the owner, although this does not quite make sense: the owner does not pay any storage fee and the third party facility, not the BMO, is responsible for any loss or damage of the gold (or silver).

Questrade and Scotia iTrade are among companies that allow you to invest in precious metals in your Registered Programs. They enable you to buy, hold and trade real gold in your RRSP. Your bullion investments with Questrade are segregated and stored at the Royal Canadian Mint in physical allocated form. Bullion investments with iTrade are held at Scotia Mcleod; their web site does not indicate whether the storage is segregated/allocated (due to lack of this information we would consider the storage to be unallocated).

Cache Metals allows you to buy, hold and trade real gold and silver in your RRSP and TFSA. Your bullion investments are segregated and stored at Laurentian Bank in physical form. The web site does not indicate whether the storage is allocated.

Note that you can invest in precious metals in your RRSP/TFSA with some of the companies mentioned in this report. However, you cannot request physical delivery of your metals due to restrictions of these registered programs, regardless of whether the company itself delivers physical metals.

 

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