With the price of gold consolidating, I think it is now a good time to start accumulating. The bull market has stalled out for a few years, but longer term gold is looking very positive. There is substantial demand coming out of Asia and the East more generally. Also, central bank demand is rising. Finally, all over the world central banks have very low interest rates. The Federal Reserve has rates at 0.25 percent and it is still buying mortgage bonds and long-term Treasury bonds, which puts more money into the economy. We also learned on Thursday that the ECB is lowering interest rates below 0 percent — the bank takes money when up store it there.
Despite all of this, downward price action has created a lot of bearishness in the gold market, and it is time to exploit this irrational negativity. But how should you buy gold? It is simple enough to simply go out and buy the SPDR Gold Trust (NYSEARCA:GLD), which is the largest and most liquid gold ETF. Investors also have a tendency to flock to the Market Vectors Gold Miner ETF (NYSEARCA:GDX) in search of leverage to the gold price. But these are poor strategies in my opinion.
With respect to the GLD, I think there are better vehicles out there. The problem with the GLD is that your gains are taxed at the collectible rate, which is 28 percent. A good alternative is therefore the Sprott Physical Gold Trust (NYSEARCA:PHYS), which, from the taxman’s perspective, is akin to a stock. If you hold it for at least a year you are taxed at the capital gains rate of 15 percent or 20 percent, depending on your tax bracket.
Another alternative is the Central Gold Trust (NYSEMKT:GTU). The great thing about this fund is that it trades at a discount to the gold price. So right now if you buy the GTU, you are effectively buying gold at $1,200/ounce.