Monday, June 21, 2010

Robert Prechter's Latest Predictions for the Rest of 2010 (Protect Yourself Now!)

Robert Prechter was Jim Puplava's guest this week on the Financial Sense Newshour.  You can listen to the entire interview here - it's almost an hour long, and it's fantastic.

Ed. Note: You can also read a full transcript of the interview here, courtesy of our friends at Elliott Wave International.

Prechter last chatted with Puplava on his program last September, as part of an inflation/deflation debate series.  That interview was also very good, and I'd recommend checking out our recap of their inflation-deflation conversation here if you missed it.

Since last September, we've seen gold rally north of $1200, we've seen US equities continue to rally, and we've seen economic pundits declare "the worst is behind us."  So, has this changed Prechter's long-term view?

In a word - no.  He still believes we're at the tip of a historic bear market plunge, which he believes will bottom out in 2016 (a date he reached via his Elliott Wave analysis).  Along the way, he sees a series of fits and starts, as the bear market descends down what he deems a "Slope of Hope."  In the last Depression, the real damage to wealth happened from 1930-1932 - a two year span - this time around, he expects the pain to be spread over an agonizing 6 year period.

Now, for some of Prechter's specific points:

Prechter on Gold

The yellow metal went higher than Prechter predicted last September, admittedly surprising him.  But he cites 98% bullish sentiment for gold amongst traders currently, and negative divergences with silver and platinum (both have not yet exceeded their 2008 highs, and silver is still well off its all-time high), along with gold stocks (also below their 2008 highs) as reasons that he believes gold investors are best advised to stay on the sidelines right here.  He likes gold as an eventual play – but thinks we’ll get a better price to “go long gold.”

Prechter on Hyperinflation

If the Fed had managed to ignite hyperinflation, he argues that everythingwould be soaring to new highs.  Specifically bothersome to him are commodities - the CRB index sits at half its 2008 price (we discussed this last week).  IF we were in a hyperinflationary environment, you'd expect everything across the board soaring to new highs.  That's not happening right now.  Commodities are off their all-time highs by 50% - similar deal with real estate, and stocks too.

Prechter on Debt

The crux of Prechter's deflation argument is that most of the current debt outstanding will go unpaid.  He laughs at the Fed's supposed efforts to print a trillion dollars or two - it's not enough.  He estimates there's a quadrillion dollars or more in debt outstanding in the world right now, and believes that there's not a sovereign entity that can print this much, because it would be politically infeasible.

To demonstrate this math, let me use an example from nearby Sacramento suburb Elk Grove, the foreclosure capital of the world right now.  We have a couple of good friends who bought their house in Elk Grove in 2005 (near the peak of the housing market) for $350,000.  Earlier this year, they wanted to get out (the town has really gone downhill since the peak), so the did a short sale, netting about $175,000.  So the bank, which had this loan on the books for $350,000, had to write off 50% overnight.  $175,000 flew away to "money heaven".

That's deflationary.

Prechter on Government and Social Mood

I really enjoy his observations on social mood, in which he ties in pop culture and societal attitudes with stock prices.  Over the next 6 years, Prechter believes that the social mood of society will accelerate to the downside.  Much of the anger will be directed towards government, he thinks.  So while FDR was able to capitalize on the negative social mood of the Great Depression to take power away from the private sector, he sees the opposite occurring over the next 6 years.

He cites current public disgust with government, which is running pretty high, and sees this trend accelerating as it becomes obvious that government economic fixes did not work and that the emperor “has no clothes.”

Prechter's Investment Recommendations

Cash - stay in cash, and stay safe.  In terms of diversification, he suggests investors diversify their types of cash holdings.  But, he does not advocate diversifying your holdings among different asset classes (the classic Wall St advice), as he expects everything across the board to get slammed again (just as they did in 2008).

For more specifics on Prechter’s Deflation Investing Strategy, I’d recommend you check out this article.

Again, the link to Prechter's interview with Puplava is here - it's definitely worth a listen.  Whether you are in the inflation or deflation camp, it will challenge your thinking - and that's always a good thing.

Ed. Note: You can also read a full transcript of the interview here, courtesy of our friends at Elliott Wave International.

Further Reading: 5 Things You Should Know About Investing During Deflation

Energy Stocks to Buy for the 2nd Half of 2010

If the global economy is indeed recovering (and granted, that's a very big IF) - energy stocks *should* continue to take off and lead the way.  But the tough thing about finding energy good energy stocks to buy is the same problem as finding oil and energy in the first place - it's tough!

Energy demand, until the recession hit, was steadily climbing each year - while supply was flat to declining. So where should you look to play this trend, if and when it resumes?

Our "energy guru" Marin Katusa says you should look to an uncovered, untapped area of the on as Marin explains...

The Secret to Finding Winning Energy Stocks

By Marin Katusa, Chief Investment Strategist, Casey Research Energy Team

As the world hesitantly emerges from recession, the one question that seems to be on the lips of investors everywhere is: what’s next? As the tragedy continues to unfold in the Gulf of Mexico, with no fix in sight, market attention has suddenly shifted to the energy sector after years of neglect. Pundits and would-be energy experts are a dime a dozen. Speculation about oversold or underbought oil abounds.

But the real profits in energy won’t be made anywhere near the Gulf and have little to do with going long or short on BP or Transocean.

They’ll come from being the first to arrive on the newest scene, getting there before the crowds do. The current economic climate has opened up doors to some exciting opportunities around the world. Discovering which of these is going to be the next big winner, however, can be quite the challenge.

A question that our subscribers ask us time and again is, “What is your secret to consistently picking winning stocks?” As seasoned resource investors, our answer today is the same one that company founder Doug Casey has been giving for decades. It’s what he calls the “8 Ps” of resource stock evaluation.

The 8 Ps are: People, Projects, Paper, Promotion, Push, Phinancing, Politics and Price. They form the basis of the job interview that any Casey stock recommendation must go through as part of the due diligence we perform.

These criteria let us look beyond a few numbers, deep into the real fundamentals of a company. But even before we turn our attention to individual companies to select the few gems that we include in our newsletter, we concentrate our efforts on finding the niche in the energy market that is about to explode. Then we can sort out who is most likely to exploit that niche.

We’ve traveled the world, and we believe we’ve found the most promising area for oil exploration.

East Africa: Oil and the Elephant

Africa might be the final frontier, the last place left on Earth where elephant deposits – very large oil and gas reserves – remain to be found. This makes Africa a central piece in the world energy matrix, and the area is getting some major attention.

When oil and Africa are mentioned in the same sentence, thoughts automatically jump to oil rigs dotting the landscapes of Nigeria and Libya. But the ship has sailed for West and North Africa – their oil fields are either producing or about to come online. Anyone looking at buying into the energy mammoths operating there will find it just too dear.

The last oil elephants are in fact thousands of miles away, in East Africa. Yet it remains, for the most part, a blank slate. If we graph oil production on the continent, the picture looks like this:

East Africa has been largely ignored since early drills, almost 50 years ago, came up dry. But then Irish oil giant Tullow discovered over 2 million barrels under the waters of Lake Albert, Uganda, in 2009, and the region suddenly shot into the limelight.

Now some of the biggest players in the field are jostling each other to get in on the action. France’s Total SA, China’s CNOOC (China National Offshore Oil Corp), and Ireland’s Tullow are only three of the energy titans wooing governments and smaller companies. Just days ago, on June 2, Afren bought out Canada’s Black Marlin Energy, in a US$100M deal that gives the formerly West Africa-focused British producer a significant foothold in the east.

But East Africa is anything but a cakewalk. Poor governance, limited rule of law, and a severe lack of transportation infrastructure are just some of the problems that companies looking to do business there are facing.

Additionally, unlike West and Northern Africa, which have a complex network of pipelines, East Africa has only two. With the Lake Albert discovery, another pipeline is being built by some of the major companies in the region, but it won’t be operational until 2011.

Violence is also a serious threat. Quite a few militant groups are active in the region, attacking oil rigs and pipelines, kidnapping foreign oil workers. And the operations of pirates in the Gulf of Aden are well documented.

Nor is political stability a given. Mogadishu, in Somalia, still remains a no-go zone. Parts of Ethiopia are plagued by rebel insurgencies, and the country is at war with Eritrea. Even Kenya, a model of governance by African standards, has simmering ethnic and political grievances that could erupt at any time.

In short, the threats to both body and business often impede a firm’s ability to function, let alone continue exploration and production in the region.

If it’s so bad there, then why is East Africa one of our top picks for 2010?

There’s an old Chinese saying, “If you don’t go into the tiger’s den, you won’t get the tiger.” As we’ve proved in the past, a high-risk project is by no means an automatic guarantor of failure. After all, this is only picking the sector... if a company sails through the Eight Ps, the potential reward can outweigh the risk.

As an example: When we identified renewable energy as the sector to watch in 2008, our recommendation was a high-risk play. Reservoir Capital, a hydroelectric company, had acquired some viable projects in Serbia, a country with great geology for hydroelectricity.

But how stable was Serbia itself? They had just lost a war, Kosovo’s declaration of independence caused the coalition government of 2008 to collapse over a weekend, and anti-Western radicals seemed poised to win the elections.

It looked grim. Yet we reasoned that no matter which party won, people still would need jobs. In a country starved for power, a company that was already open for business, with good prospects, was miles ahead of the competition. Not to mention that Reservoir had balanced its position by putting its fingers in a couple of mineral deposit pies as well.

A green light for Politics, albeit shaky, meant that Reservoir had successfully passed through the 8 Ps. And sure enough, our high-risk gamble paid off, garnering over 300% in gains for subscribers, as you can see:

Like Serbia, East Africa is certainly an intimidating prospect, but that doesn’t mean investors should stay away. Better technology, higher world oil prices and decreased risk in some of the countries (compared to 20 years ago) have turned the scene on its head.

Realistically, only five other regions remain where an oil elephant may be found, and they all have their problems. The Gulf of Mexico is going to be hit with tighter regulations. Iraq and Iran are crippled by terrible royalty structures. West Africa and Brazil are restricted to the big boys, since new fields are so costly to bring online.

That leaves East Africa.

For the smaller fry in the oil industry, the area represents their best chance to get in on the ground floor and reap potentially huge rewards in the future. For the government players, East African oil can generate much-needed cash, as well as help meet their nations’ rising energy needs. And for the majors, a shiny new market is opening up.

This corner of the world is elephant country in more ways than one. It is, in our opinion, the place to watch in the near future. But not everyone will hit the energy jackpot, of course. In East Africa, as elsewhere, it’s survival of the fittest, and our job is to determine who’s most likely to come out on top.


Marin is the senior editor of Casey’s Energy Report, focused on discovering outstanding small-cap opportunities in the energy sector, such as the ones mentioned above. And he’s simply the best at it. It’s no coincidence that of 19 recent stock picks, all 19 were winners... a 100% success rate. Learn in this report how you, too, can profit from his expertise and spot-on instincts.

Wednesday, June 16, 2010

3 Reasons You Should Buy Silver Right Now

With sovereign nations around the globe printing money as fast as they can, what should you invest in to protect your savings?  Gold?

What about silver?  Unlike gold, it's actually far below it's all time high - and very cheap when compared with gold right now.

To explore the silver market further, we turn to Jeff Clark, our precious metals expert.  Jeff believes silver is indeed a good play right here - read on to learn why...

The 2010 Silver Buying Guide

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

Silver has been sizzling and causing lots of buzz in the industry. Investors are excited.

Part of the hubbub is due to its current run. Since its February 8 low, silver has roared ahead 22.4% (through June 21) and has doubled from its November 2008 low.

This excitement has spilled over into greater investment demand – especially so for coins. The U.S. Mint sold more Silver Eagles in the first quarter of this year – just over nine million – than any prior quarter in its history. The Royal Canadian Mint produced 9.7 million silver maple leafs in 2009, also a record.

Take a look at the jump in U.S. Mint coin sales since 2007.

Silver bullion ETFs are growing, too, experiencing a five-fold increase in metal holdings since 2006.

There’s plenty we could talk about with silver, but our goal is to make money. So let’s focus on answering just two questions: Is today’s price expensive or cheap? And, what are the best silver coins, ETFs, and stocks to own?

We have all the answers straight ahead, including lots of actionable info, so let’s jump right in...

Why Should I Buy Silver?

There are several reasons to own silver in addition to gold.

First, it’s cheaper! Known as the poor man’s gold, those with limited budgets will find it easier to purchase. You might hesitate plunking down $1,200 for an ounce of gold, but you can pick up 32 ounces of silver for half that amount.

Second, silver has wide industrial use and this component can help or hinder its price. As its consumption increases across a growing number of industries, this should help place a floor under demand. And because of its unique properties, new uses continue to be discovered.

Third, silver is money and has served this role more than any other material on earth, save gold. Due to its historical role, silver will always have monetary value and offer similar protection as gold to the ongoing global currency devaluations, and will definitely benefit from the inflation hurricane we see as inevitable.

Silver is more practical as a currency used for everyday purchases. When the time comes, you can sell the requisite number of silver coins to cover a specific need, as opposed to being forced to liquidate a high-dollar-value gold holding. Silver is perfect when smaller amounts of cash are required.

Fourth and last, silver could possibly outperform gold before this bull market is over. The market capitalization of silver (and silver stocks) is much smaller, making its price more susceptible to demand spikes than gold.

In the latter part of the 1970s precious metals bull market, gold gained over 700% – but silver soared over 1,400%. If you’ve got a bit of Gordon Gekko in you, we recommend investing a portion of your dollars in silver.

Caution - Hot!

Like all things, silver has its drawbacks, two in particular.

First, the price is volatile. Over the past 12 months, silver has seen gains of 53.8% and 22.9% and drops of 21.9% and 19.6%, all within a period of months or even weeks.

If you’re going to own silver, you must be prepared for big price gyrations. The best way to do that: buy it and forget about it. And...

Make price volatility your friend. Big price swings present the opportunity to snag silver at a big discount. We give some guidance on prices below.

Second is the storage issue. As your pile grows, the advantage to storing gold will become self-evident. At $1,200 gold and $18.50 silver, $10,000 will get you eight gold eagles that will fit nicely in the credit card slots of your wallet; however, it will buy 540 silver eagles, weigh nearly 34 pounds, and fill a small bank safe deposit box.

How to store physical silver. There are several ways to solve the storage dilemma, even if you plan to buy like the Hunt brothers.

1. Spread your holdings around. Not only is it wise to avoid keeping all your physical silver in one place, diversifying your storage arrangements allows you to buy more. Hide some at home in several locations (no cookie jars, though), and obviously tell only one trusted person. Store some in a bank safe deposit box and use more than one bank as your holdings grow.

2. Buy bars. Silver bars take up less space than a pile of coins of the same weight. We wouldn’t start out with nor have all our holdings in bars, because you want the advantage coins offer. But the larger your holdings, the easier it will be to store some of it in bar form.

3. Use pool accounts and unallocated storage. With a pool or unallocated account, you’re essentially getting free storage no matter how big your stash. That’s hard to beat. You’ll pay fabrication and delivery charges if/when you convert your holdings and take delivery, but in the meantime, you save on storage costs. Great value for the large holder.

4. Private storage. Store your silver with a private vaulting company. The advantage is that it’s outside the banking system; the disadvantage is that it’s usually expensive, though it can be cost effective for large holdings. Do your own due diligence if you go this route because we can’t vouch for any facility, but you could start by checking out Keep in mind that using a vaulting facility beyond a reasonable driving distance will mean added shipping/insurance costs and restrict quick access.

Is Now a Good Time to Buy?

With the gains we’ve seen in silver, would we buy right now?

Let’s first look at the big picture. The following chart shows how far silver is below its inflation-adjusted peak reached in 1980.

Another clue some investors watch is the gold/silver ratio (gold price divided by silver price) shown below.

Since our current bull market in precious metals began in 2001, the ratio, while fluctuating wildly, has never gone below 45. And yet look where it went during the precious metals peak in 1980: it bottomed at 17. Even though gold was soaring at the time, silver outran it.

The ratio might show relative strength between gold and silver, but it’s not a good buying indicator. A falling ratio could mean silver is rising faster than gold, like it is currently, or it could mean silver is falling slower. As a result, we’d use the ratio to determine silver’s upside potential but not necessarily when to place an order.

These big-picture signals tell us silver is undervalued and, at the moment, a better bargain than gold. And given the currency crisis we’re convinced is in the cards, we wouldn’t want to be caught without any. If you have a long-term mindset, silver is a buy today.

Would we wait for a better price?

If you do not own any, and plan on holding what you buy until a mania develops, then we wouldn’t wait. The risk of buying silver at current prices is lower than owning none at all.

If you do own some but want to add to your holdings, we’d probably wait for a drop in price, in part because silver could more easily fall when the economy is found to be more fragile than what many believe. And with industrial uses comprising approximately half of silver’s demand, it would be more susceptible to sell-offs than gold if our research is correct about global economies.

Further, summer usually brings pullbacks in prices, and this can be especially true for silver stocks. This is the tendency, though we can’t be sure if this summer will follow past trends. Still, our best guess is to anticipate another leg down this year. If you already own silver, we’d look for a correction to add to your holdings.

In our opinion, owning no silver in this bull market would be a mistake. And your first (and biggest) investment in silver should be in a physical form.

How much physical silver should you have? There’s no right answer and one size will not fit all. But we do recommend holding more gold than silver. Our suggestion for your precious metal holdings is roughly 80% gold and 20% silver.

Like gold, silver comes in different forms. We’d start with the more popular one-ounce coins and then branch out into other types as your holdings grow.

[The above is an excerpt from the May issue of Casey’s Gold and Resource Report. Find out our top recommended dealers, including special pricing, along with Jeff Clark’s picks for the “best silver ETF” and the “two best silver stocks in the world.” And our June issue is our annual Summer Buying Guide. You can check it all out risk-free, for just $39/year, with a 3-month, 100% money-back guarantee. Get it right here.]

Ed. note: I am a subscriber and affiliate of Casey's Gold and Resource Report.

Wednesday, June 09, 2010

Trading the Short to Intermediate Time Frame

By Guest Blogger Jennifer Gorton from ForexIndicators

As an investor or trader, picking a time frame on which you plan to hold your assets is entirely up to you. There are many people out there that wish to close out their positions at the end of each day to avoid the risk of major market news effecting an open position. Recently, markets will move drastically during the overnight period due to new stories from around the world occurring during that time. If other markets like Asia and Europe are selling off there is a good chance that the U.S. stock exchanges will open lower and those who have held positions overnight will lose money. There are other traders who will take this risk because they are buying the asset to be held for longer than a few days.

If you are looking to become a short to intermediate term trader but do not want the risk of a big overnight move, trading commodities and currencies is a better option. The average investor can trade the commodities market, by way of the CME Globex electronic exchange, 23 hours a day 5 days a week. The currency markets are open 24 hours a day 5 days a week, giving you that one extra hour to place trades. Trading of commodities products and currency pairs after normal market hours will allow the trader to monitor his position in real time and close it out if necessary at anytime the market is open. He or she will not have to wait until the next day’s open outcry session when the price of the commodity he is holding might have fallen. This can allow the investor to have an intermediate time horizon for holding his investments with the safety of being able to trade most hours of the day. Many potential trades that people see occurring take time to develop. Sure you can make a few dollars day trading throughout the day but having to always watch the market might not be what you are looking for. The average investor will not want to day trade because of work related issues. They will not want to sacrifice their salary job to become a full time intraday stock trader.

The intermediate and short term investment style is for those who have a good idea but do not want to be at the computers all day. Commodities and currency trading allow you to have that investment mindset with the additional benefit of being able to have orders executed when you are asleep if necessary. Programming your trading software with predetermined buy and sell orders will allow you the ability to stop out a position if it starts to move against you. The same would also be true if hit your profit target at 2AM when you are asleep; letting your computer do all the work is the way to execute orders. Both commodities and currency brokers will allow their clients to submit limit orders at prices they want to buy and sell. This technique for the short to intermediate trader is widely used. Having a stop loss number where you will close your position and a profit target where you will take profit is a must. The various brokers will offer free forex indicators and free commodities indicators that can help you decide at what price these order should be placed. Along with the charting software that your broker will allow you to download, short to intermediate trading is the preferred style of investing. Using commodities and the foreign exchange market as a vehicle to trade is perhaps safer than the equities market because of the hours it is made available for trading to the average investor.

Thursday, June 03, 2010

What Renewable Energy Should You Invest In - And Profit From the Oil Spill?

While the oil spill may have been a real bummer - like true capitalists, it's our job to ferret out profits from the carnage!  So where should we look?  You'd expect renewables to get a nice boost - but which ones?  Our energy correspondent Charles Brant explores this question, and shares his favorite place to look for investment opportunities - and the pot is even sweeter after the spill...


Who Will Profit from the Oil Spill?

By Charles S. Brant, Energy Correspondent, Casey’s Energy Opportunities

The disaster in the Gulf of Mexico may be the best thing that’s ever happened to green energy producers in the U.S – but the one that benefits the most will probably surprise you.

As the damaged Deepwater Horizon well continues to pump out 5,000 barrels of oil per day into the Gulf, all the major stakeholders are scrambling to find a way to contain the damage. Investors in BP, Anadarko, Transocean, and Halliburton have had a rough few weeks and should be nervous about the future. The growing political firestorm that’s accompanied this ecological disaster is drastically reshaping the energy landscape in the U.S. There’s huge money to be made from the biggest structural change to the energy markets in the past 50 years, if you know where to look.

The political and economic fallout from this accident is starting to take shape, with the executives from BP, Transocean, and Halliburton being paraded in front of Congress for a public chastising. Predictably, politicians are making stern promises of tighter regulations in the future.

At this point, it’s a guessing game as to what the new permanent regulations will be. So far, a temporary moratorium has been put in place on the issuance of new offshore oil and gas drilling permits. In addition, the Department of the Interior plans to restructure the federal Minerals Management Service (MMS) to eliminate the conflict of interest inherent in its role of monitoring safety, managing offshore leasing, and collecting royalty income.

The Department of the Interior has plans to make offshore drilling rig inspections much stricter. Interior Secretary Ken Salazar has also promised tighter environmental restrictions for onshore as well as offshore exploration and production. Lastly, in a knee-jerk reaction to the oil spill, the Senate Climate Bill gives states the right to veto offshore projects within 75 miles of shore.

Although these regulatory changes aren’t set in stone yet, it’s a foregone conclusion that any company involved in offshore drilling will feel some pain. Any exploration and production company that continues to operate offshore will face reduced margins from a higher-cost structure from increased taxes, regulation, and insurance.

Offshore production supplies a large amount of oil and gas to the U.S. The U.S. Energy Information Agency estimates that U.S. offshore reserves account for 17% of total U.S. proved reserves for crude oil, condensate, and natural gas liquids, as the illustration below shows.

Of the total known U.S. offshore reserves, the Gulf of Mexico accounts for 90%, with the rest found in California and Alaska. In 2009, BP produced nearly a quarter of all the Gulf’s oil and gas located in federal water. Shell and Chevron produced 12% and 11%, respectively.

The sheer size of offshore reserves guarantees exploration and production will never be completely abandoned in the U.S., but don’t expect any growth. In fact, the Gulf of Mexico disaster probably destroyed any hope of any future drilling in environmentally sensitive areas, like the Arctic National Wildlife Reserve.

The market has reacted strongly to the spill, punishing the stocks of every company involved in offshore drilling. Now many are suggesting it might be an overreaction that could benefit your investment portfolio if you dare buy in now. However, there are better ways to work this news to your benefit.

The oil spill will be a very expensive setback for all the players involved in offshore production; we’ve already seen that reflected in their stock prices. In the near term, offshore exploration and production companies and the oil services companies will show margin erosion as they digest higher costs. In the medium term, some companies will pull up stakes and move completely into non-U.S. offshore projects, as they’ll realize the cost of doing business in the U.S. outweighs any potential gains.

The market might be overreacting, but we’re not convinced these depressed stocks represent good value. While it’s possible there are some good bargains, it’s still too early to consider speculating in any offshore-related companies. Specifically, the threat of increased regulation, massive tax increases, and rising insurance costs will create a hostile environment for these companies going forward.

Instead of risking your capital on so many unknowns, a prudent alternative is to look at energy producers in the renewable energy sector. The oil spill has only strengthened the current administration’s resolve to make greener energies supply a larger chunk of America’s energy needs in lieu of traditional fossil fuels. Congress is doing its part by giving huge subsidies to companies in this field.

There are a lot of renewable options that will benefit from the subsidies and political wrangling, but our current favorite by a long shot is geothermal power.

Of all the renewables, we think geothermal has the best upside potential. Based on economics and efficiency alone – unlike wind and solar energy, geothermal is reliable for round-the-clock generation and is already price competitive with fossil fuels without any subsidies – geothermal outperforms competing renewable technologies.

Add the government subsidies on top of the existing good economics and the pot gets even sweeter in the short term. Once the spill is finally contained, attention will shift to previously low-key renewables, like geothermal, and soon after the market will recognize geothermal as the clear winner.

We’ve researched companies up and down the geothermal supply chain and we’re seeing value in a number of quality companies that we think are poised to outperform. With the coming flood of money and attention that will be focused on green energy, you’ll want to move quickly before these bargains go away.

Want to know which geothermal stocks are set to explode to the upside? Try Casey’s Energy Opportunities risk-free for 3 months today and gain access to one of the best energy analysts of our day, Marin Katusa. Marin and his energy team know all the inside details and have prepared a shortlist of the best companies to own. For only $39 per year, they will keep you in the loop on nuclear, geothermal and other renewable energies.

Wednesday, June 02, 2010

Gold Tax Rates and Collectible Tax Treatment Breakdown

The taxation laws with respect to gold are often very confusing, as the IRS considers gold a "collectible" - which renders it subject to a higher capital gains tax rate, generally speaking.

Since a lot of readers here invest in gold, we thought we'd tap gold investing guru Jeff Clark for some advice about the tax treatment of gold.  If this is an area of interest to you, read on as Jeff breaks it down...


Give unto Caesar - What to Pay When You're Selling

By: Jeff Clark, Senior Editor, Casey’s Gold and Resource Report

Proper planning with your finances is incomplete until you consider the endgame consequences of your investment decisions today. So, what are the tax consequences of selling gold, gold ETFs, and gold stocks?

There’s lots of conflicting and inaccurate tax information on the Internet about this. We know of one site that claims the sale of silver Eagles is exempt from capital gains tax due to some obscure law (not true). So, let’s nail down the current tax rules for selling gold in the U.S.

[The following information pertains to U.S. taxpayers only and is not intended as nor should be considered personal tax advice. Always consult a financial planner and/or tax professional before investing.]

►The IRS considers gold a “collectible” and will tax your capital gains at a 28% rate. This designation includes all forms of gold (other than jewelry), such as...

  • All denominations of gold bullion coins and numismatic/rare coins, gold bars, and gold wafers
  • ETFs like GLD, SLV, etc. (closed-end funds have different rules; see below)
  • Any electronic form of gold like GoldMoney and Bullion Vault
  • Any “paper” or certificate forms of gold, such as Perth Mint Certificates and EverBank accounts
  • All forms of pool gold, rounds, and commemorative coins

And the same designation and rules apply to silver, platinum, and palladium.

►“Reporting” requirements can be confusing. It is true that precious metals dealers aren’t required to report certain small sales to the IRS – but that doesn’t relieve you of the obligation. If you sold one gold or silver coin to your local dealer, he is not obligated under current regulation to report the sale. But selling at a profit requires you to report it and pay 28% tax on your gain.

Keep in mind that the Patriot Act obligates a dealer to report any “suspicious customer activity.” Therefore, don’t expect a wink from your dealer if you proclaim you won’t be reporting your sale or ask him to “book” only half the coins you sell him. There are people sitting in prison who’ve tried this.

►Gold stocks are not designated as a collectible and are therefore subject to the standard capital gains tax rates like all other stocks.

►Gold jewelry sales are not reportable. This makes the Heirloom Collection an attractive consideration and an excellent diversification maneuver (for both financial and romantic reasons!).

►We wouldn’t advise making your investment decisions based solely on tax considerations. You should own both gold and gold stocks for different reasons – gold for wealth protection and gold stocks for profit potential.

►There’s a lobbying arm for our industry, the Industry Council for Tangible Assets. Their efforts are mostly for dealers, but their website contains valuable information on this topic.

PFICs: Blessing or Curse?

For U.S. investors, there’s one more tax consideration if you own, or plan to own, a closed-end fund (whether it’s precious metals or otherwise).

For example, the Central Fund of Canada (which holds gold and silver bullion) is considered a Passive Foreign Investment Corporation (PFIC) for U.S. investors. This is a complex topic, but what I learned could save you some dinero now and some hassle later if you own a foreign closed-end fund like this one.

Keeping it simple, if you own CEF, you can qualify for the standard capital gains tax rates, instead of the 28% collectibles rate, if you file a timely and valid Qualified Electing Form, or QEF. There are several options you can take with a PFIC, but this is the most common election.

Even if you don’t sell the fund in any given year, you must file this form every year. If you don’t complete an annual QEF or make one of the other elections, you could get hosed when you eventually do sell because your gain will be considered ordinary income, forcing you to pay interest and penalties on top of the regular tax.

You can hold a PFIC stock for years without paying tax, but if you haven’t made a QEF or other election, you get the bad result we’re describing when you sell. Further, if the PFIC company reports income in a given year, this income is reportable and taxable as regular income that year, even if no stock was sold and even if the stock ended down on the year.

The point here is obvious: don’t blindly buy into a PFIC.

The QEF benefit is clear: you can cut your tax liability up to 46%, the difference between the 15% long-term capital gains rate and the 28% collectibles rate. Yes, capital gains rates are scheduled to rise next year, but this option still reduces your tax liability.

A successful investor is an informed investor, and you should read the prospectus of any closed-end fund before buying. And if you don’t want to mess with the tax hassle, use an ETF instead.

What ETFs and closed-end funds do we recommend? If you like this kind of fact-based research, you might also appreciate our recent analysis of the best gold and silver ETFs, along with our just-released 2010 Silver Buying Guide. For only $39, you can access all our research and recommendations for one year, risk-free. To learn how the right stocks and funds can give you considerable leverage to gold itself.

Ed. Note: I am a Casey Research affiliate, as well as a long-time subscriber to their Gold & Resource Report.

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