The Basics of Central Fund of Canada

Worldwide Invest Better Day 9/25/2012

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, and be sure to follow the Fool's coverage using our My Watchlist feature. You can also get some insight on gold mining stocks as an alternative to bullion investments in the Fool's special free report, "The Tiny Gold Stock Digging Up Massive Profits."

Please stay tuned throughout the month for other informative articles covering a wide range of important topics. Let me also encourage you to take a look at the special website we've set up at InvestBetterDay.com. On Sept. 25, we're taking a day to celebrate the art of investing, and we encourage your participation. Take a look at the site now and get on the path to personal prosperity.

Fool contributor Dan Caplinger owns shares of Central Fund of Canada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy likes giving you the basics.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 27, 2013, at 6:58 PM, rw84041 wrote:

    Dan, what are the U.S Federal Tax implications of holding CEF inside a Roth IRA?

  • Report this Comment On August 23, 2013, at 2:03 PM, EricTheRon13 wrote:

    One other thing you should mention about the ETFs like GLD and SLV. If you own them in a taxable account, there is an onerous IRS headache at tax prep time. These ETFs sell a little of their bullion each month to cover their expenses, and in essence you have to calculate your share of these relatively tiny sales and whether each was a gain or loss (like, pennies). This is a real PITB, and makes something like CEF a better thing to hold in a taxable account.

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