Happy Friday everyone!

Good questions this week so let’s get right to it…

First two great comments from Facebook that are worth sharing (and if you haven’t “liked” our Facebook page yet and want to join in on the conversations there, you can do so here).

1. Gary says, “If you have to own a financial instrument and not physical, much better to have CEF or PHYS than GLD”, and Steve adds that Goldmoney.com is also a good option.

I want to comment on this, though it’s not necessarily a “question” per se, because I completely agree. I own CEF (Central Fund of Canada) and didn’t have room yesterday to expand the discussion to closed-end funds (or many of the other forms of “paper” gold…there is a plethora!). In my opinion, CEF is one of the best ways to own paper gold (and silver).

You can read more about CEF here, but the net of it is that it has been around since 1961 and is structured as a mutual fund so receives the preferential tax treatment of long-term capital gains (currently 15%) versus the “collectible” tax rate of GLD (currently 28%). Additionally, their bullion is stored on an allocated and fully segregated basis in the underground vaults of the Canadian Imperial Bank of Commerce and is inspected and audited twice per year by external auditors and the bank’s personnel.

Because it is a closed-end fund, it trades at either a discount or a premium to its net asset value (NAV). Today as I write this, the premium is only .1%, so if you’re considering adding it to your portfolio, it’s certainly not a bad time to buy (although realize that gold is very volatile in the short-term, so do your homework first). A good rule of thumb is to buy whenever the premium to NAV is less than 5%.

One last note—CEF holds a combination of gold and silver bullion (and a small amount of cash), so it’s not a straight “gold-only” fund. Currently the mix is 52.9% gold, 45.9% silver, and 1.2% cash. (They do have a gold-only counterpart, GTU, that you can look into if you’re interested).

PHYS is similar to CEF in that it is a closed-end mutual fund and therefore receives the preferential long-term capital gains treatment. It is relatively new, however, launching in February of 2010 (not quite two years old). It is 99.5% gold and the gold is stored at the Royal Canadian Mint in Ottawa on an allocated basis. I do not personally own PHYS, but if you are interested in adding it to your portfolio you can check it out here (it’s currently trading at a 2.57% premium to NAV).

GoldMoney.com is interesting for several reasons:

  1. You can purchase gold in “grams”, which is a fraction of an oz…the current spot “Gold Gram” price is $55.45, so if budget is a factor in your gold purchases, GoldMoney.com is a good way to get started.
  2. You own the actual physical gold that you purchase—it is allocated in your name, and is stored internationally in vaults in London, Zürich, or Hong Kong, although it is stored in 400-oz. London Good Delivery Bars so technically you own a fraction of a bar (unless you choose to register a 400-oz. bar in your name, which they do allow, but of course you need $690,000 USD as of this writing to do so!).
  3. You can take delivery of your physical gold at any time in denominations of 100 or 1000 gram bars, although there is a slight “melt” fee to do so because they have to melt down a 400-oz. bar and recast it into smaller bars.

Their fees seem to be reasonable and are well-articulated and clearly laid out on their website. I do not have a GoldMoney account but know several people who do and am considering it. James Turk, the founder, is well-respected within the industry, and you can find out more about GoldMoney.com here.

2. Next, Raji asks, “My vision is to start making real money in the stock market.I have taken some courses, but have been unable to succeed the way I expected.”

Raji, I feel for you. It sounds like you are off to a great start by taking courses and getting some financial education…I highly recommend that!

Right now, however, the stock market is a difficult place to make money (not that it’s ever “easy”, necessarily, but right now it is exceptionally tough). The extreme volatility over the last few months and the fact that the markets are moving as much on headlines and rumor as they are on fundamentals makes it very tricky for an individual retail investor to navigate, particularly if you are just starting out.

Even so-called “pro” hedge fund managers are losing tons of money, and you need to be extremely careful of whom you choose to take your advice from. (One of our core Kung Fu Finance tenets, as you know, is “Think for Yourself, Grasshopper!”).

For example, take a look at Whitney Tilson. On paper, this guy looks like a genius—he’s a hedge fund manager, a published author, is regularly featured on CNBC, and earned both his undergrad and his MBA from Harvard University “with distinction” (top 5% of his class).

He’s a “value investor” like Warren Buffett, but he’s had terrible performance all year—he’s underperformed the S&P 500 and the latest “anti-Tilson” ETF (not a real ETF, but tracked on ZeroHedge.com) is up 30+%.

But to be fair, it’s a tough market. You have to be able to protect your downside with trailing stops, and also be willing to hedge your positions with shorts, which a lot of people do not want to do.

My best advice is, be encouraged (you are not crazy—we live in difficult financial times right now) and keep learning….you will succeed!

That’s it for today…. have a great weekend, and thank you for reading and being a part of our Kung Fu Finance community!

To your success,

—Kung Fu Girl