The Basics of Central Fund of Canada

By Dan Caplinger | September 17, 2012

The Motley Fool has helped ordinary people become better investors for nearly two decades. This month, we're reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.

Along those lines, I'm looking at several different exchange-traded products in the market today. These products have skyrocketed in popularity, but it's important to understand exactly what you're getting when you buy one. Today, I'd like to focus on the Central Fund of Canada (NYSE - CEF), a closed-end fund that gives you an easy way to own gold and silver.

Why buy Central Fund of Canada?

For more than a decade, both gold and silver bullion have seen their prices rise dramatically. As the stock market has endured a rocky road with two major bear markets, precious metals have had a fairly smooth ride higher.

Central Fund of Canada certainly isn't the most popular investment tied to gold and silver prices. SPDR Gold (NYSE - GLD) has more than 1,300 tons of gold in its coffers, while iShares Silver Trust (NYSe - SLV) owns almost 10,000 tons of the white metal. By contrast, Central Fund owns just 1.7 million ounces of gold and 77 million ounces of silver, with a total value of about $5.7 billion.

What Central Fund gives you, though, is the prospect for favorable tax treatment. Many gold and silver investments are taxed as collectibles, with a 28% maximum long-term capital gains applying to profits from sales. But, under certain circumstances, you can treat Central Fund as what's called a "qualified electing fund" and therefore potentially qualify for a lower 15% maximum capital gains rate under current law. Sprott Physical Gold (NYSE - PHYS) has some of the same tax benefits, but Central Fund is less expensive to own, with annual fees of $31 per $10,000 invested taken directly from fund assets.

One thing to watch out for from closed-end funds like Central Fund is whether the shares you're buying are worth more than the proportional share of assets inside the fund. For Central Fund, shares traded at more than a 5% premium to the net asset value of the fund's gold and silver. That's fairly common for Central Fund, but it could result in losses if you have to sell when the premium is lower.

Learn more

Central Fund of Canada gives you easy access to a gold and silver investment. To learn more about Central Fund, use this link to the fund's main information page.