I am often asked what is the best or safest way to get exposure to precious metals. To be sure, there is a dizzying array of options from owning and storing the physical metal yourself to buying junior mining stocks. But the current crisis of confidence, brought on by the collapse of institutions that nobody thought could fail and the most recent $50 billion Ponzi scheme, has investors looking at safety and wealth preservation more than ever.
Buying physical gold and silver gives the owner definite possession, but comes with high premiums and the necessity to store and protect the metal. This can be done via a bank safe deposit box, but adds to the cost of owning the metal and doesn’t provide total peace of mind for many investors that have lost trust in the banking system. Others might prefer to store the gold on their property, hiding it in the floorboards or purchasing a safe. But this potentially puts you and your family members in harm’s way and again does not offer 100% security.
For investors that prefer not to hold the physical gold, yet place a high value on the safety of their investment vehicle not to default, I recommend the Central Trust of Canada (CEF) or its all-gold counterpart, the Central Gold Trust (GTU). Unlike the popular ETFs such as GLD and SLV, these funds do not lease out your gold and they always maintain 90% or more of assets in unencumbered, segregated and insured, passive long-term holdings of gold and silver bullion. Trace Mayer of Runtogold.com, recently published an article detailing the risk of investing in GLD and SLV. James Turk and others have also covered the unanswered questions about these ETFs in earlier articles.
Setting itself apart from the competition, the stated investment policy of the Board of Directors requires Central Fund to maintain a minimum of 90% of its net assets in gold and silver bullion of which at least 85% must be in physical form. On July 31, 2008, 97.6% of Central Fund’s net assets were invested in gold and silver bullion. Of this bullion, 99.3% was in physical form and 0.7% was in certificate form.
Central Fund’s bullion is stored on an allocated and fully segregated basis in the underground vaults of the Canadian Imperial Bank of Commerce, one of the major Canadian banks, which insures its safekeeping. Bullion holdings and bank vault security are inspected twice annually by directors and/or officers of Central Fund. On every occasion, inspections are required to be performed in the presence of both Central Fund’s external auditors and bank personnel. Central Fund’s chief executive comments:
“Our bullion is stored in separate cages, with the name of the owner printed on the cage, and on top of each pallet of bullion it states Central Fund or Central Gold-Trust. This disables the bank from using the asset from any of their purposes. We also pay Lloyds of London for coverage of any possible loss.”
Adding to investor peace of mind, CEF has been around since 1961, is based outside of the U.S. (Calgary, Canada) and is run by a board that is respected in the precious metals community, not a bunch of corrupt Wall Street cronies. Demonstrating transparency that is much needed in today’s investment climate, Central Fund makes regular trips to visit the assets and takes their auditors with them. And you get the sense that you are dealing with honest gold investors and not slick marketing or public relations specialists by taking a quick perusal of the CEF website. While they aren’t going to win any design awards, the website is packed with all of the investor information necessary for due diligence.
On the downside, CEF does come with a hefty premium (currently at 16% to NAV). But this premium is less than the premium you are likely to pay on physical bullion, so it is a non-issue for me. And while it is a greater premium than GLD or SLV, I am willing to pay it since I have about as much faith in those ETFs as I do in the Comex.
Tax implications are another deciding factor. Ian McAvity, founding director and advisor to CEF, said there are definite tax advantages to CEF as opposed to an open-ended ETF. Long term gains in the gold ETFs (and presumably Barclays’ silver ETF) would be taxed as collectibles at 28%, according to the Gold ETF prospectus. As a passive foreign investment company with shares not convertible into bullion, CEF is believed to qualify as a PFIC to enable the 15% capital gains tax treatment, which can be an important factor for investors with long-term ambitions and taxable accounts, said McAvity.
Lastly, we should consider the performance of the various investment options. Year-to-date CEF underperformed by 3 points versus GLD, but this is largely due to the silver exposure. A more fair comparison would be to use Central Gold Trust (GTU). GTU significantly outperformed GLD (14 point gap), which should ease any concerns investors have about a higher premium. CEF and GTU offer not only more peace of mind, but better returns compared to the “trust us, the gold/silver is there” approach from iShares (SLV) or SPDR (GLD). It is also interesting to note that the Gold Miners ETF (GDX) is the worst performer year-to-date. This could change as precious metals prices take off in 2009, but I am inclined to park at least half of my gold/silver investments in a safer place than stocks or funds that can’t prove that they actually have physical gold to back my investment dollars. Year-to-date returns are as follows:
While GTU has outperformed CEF during 2008, I expect silver to outperform gold during the next upleg and thus I own and favor CEF for 2009. Regardless, both of these funds represent sound investment choices during a time when there are fewer and fewer safe places to park your assets. If you are interested in receiving my monthly newsletter, viewing my portfolio and receiving weekly trading alerts, click here for more information on the premium subscription service. Peace and prosperity to all.
One big WARNING. Buy CEF only immediately after they announce a ‘non-dilutive’ to NAV offering when the premium to NAV is in the 1-2% range.
Thanks Bob, good advice if investors want to wait. That is certainly the best time to buy, but I expect big moves in gold over the next 6-12 months and would not want to miss any of it. Just my opinion.
Another reader also commented the following regarding tax implications:
Hi Jason,
Thanks for all of your fine articles.
You mentioned the GTU in your article today.
I noticed that it is taxed as a mutual fund –which means you are taxed each year, sell or not. That is something your readers may want to know as it can be a bad surprise in April forcing selling at what could possibly be an inopportune time.
The GLD, taxed as a collectable, or 28%, but only when you sell. But the GLD is not safe enough.
-Sheila
This is a very helpful site that calculates the CEF premium in real time:
http://www.silveranalysis.com/cef-premium/
CEF says their offerings are non-dilutive to NAV. The day after I bought the NAV dropped over 13% when gold and silver were flat. So beware of these offerings, which in reality are dilutive.
Point taken about timing and dilution. But in the end the most important thing is return over the course that you hold it. GTU is up 26% ytd and GLD is up just 3.6%.
For fair comparison to CEF, average the returns of GLD and SLV. It is an approximate loss of 12%. CEF is up a point.
Even if you mis-time a buy, you still end up ahead of the other bullion ETFs and way ahead of the mining stocks ETF, this year at least. I’m happy with a double digit gain in a year when the Dow is down about 40%
Jason,
I find the premiums of the CEF very high and I’m reluctant to buy into it.
What is your opinion of the BMG Bullion Fund (BMG100,Class A) as per following from their website? There is no premium to pay . The MER is around 2.37 percent per year.There is a sales commission to be payed to the dealer/broker thru which you buy it. there is also an early redemtion fee of 3 percent if redeemed in less than 180 days :
BMG BullionFund
The world’s first and only open-end mutual fund trust that invests exclusively in equal proportions of unencumbered, fully allocated gold, silver and platinum bullion.
BMG BullionFund’s* investment objective is to provide a secure, convenient, low-cost, low-risk alternative for investors seeking the benefits of capital preservation, appreciation, portfolio diversification and hedging that only bullion ownership can offer.
The Fund has a fixed investment policy of purchasing equal amounts of each metal, and does not employ derivatives, futures contracts, options or leasing. Since the Fund is priced daily at Net Asset Value, there are no premiums, discounts or liquidity constraints. In this way the Fund’s assets are not dependent on anyone’s promise, representation or ability to perform. The Fund’s assets are not someone else’s liability.
Bullion holdings are fully insured, and stored under a custodial agreement with the Bank of Nova Scotia on a fully segregated, allocated basis. The accounting firm of KPMG, LLP inspects and verifies holdings annually.
The Fund qualifies for Canadian RRSPs, RESPs, RRIFs and LIFs, and offers both Canadian- and US-dollar denominated units in several different classes. Each asset class is designed to suit not only the requirements of Canadian retail and institutional investors, but also of US and international institutional investors, hedge funds and global accredited investors.
* Formerly known as The Millennium BullionFund more info
Alert: BMG BullionFund fund code change. more info
Thanks for your opinion.
What are the chances that CEF will go bankrupt?
There is another way to hold fully allocated gold, silver & platinum. Check out Bullion Management Group.
How much do the premiums vary for CEF and GTU? If the premium is pretty stable, you can expect to get it back when you sell, so it is not as bad as it looks. Are the premium fluctuations charted or tabled anywhere?
comment to bob – i don’t think a holder of bullion can really go bankrupt in the sense of a common shareholder being left in a lurch. hence my interest in this vehicle. Correct me if i’m wrong.
comment regarding the ‘premium’, if it’s always around 10%, does it really matter what it is? Be wary when it varies from this if you are moving in and out a lot (day/swing traders). Obviously buy when the premium is lower and sell when the premium is higher, but over the long-haul, the actual value shouldn’t matter if it floats around any given number.
question – how do you know when these non-dilutive actions are going to take place? not only did my share value dump 13%, but my damned stops went off, leaving me behind as it climbed 7 more percent… sure, in this market time will make it up, but I have no doubt that I was robbed of 20% of my investment that day. That’s real money.
cheers,
–ikk
I know you feel like you got hosed by the last secondary, but they really are non-dilutive. The shares are priced at a premium to NAV, albeit generally a much smaller premium to NAV than the current market price of the shares. But then CEF immediately buys gold and silver with the proceeds. So what really happened is that the premium to NAV got reduced, but the gold and silver holdings increased.
I really don’t know how CEF determines it’s time to do a secondary, but if you think gold and silver will be going up at the time of the secondary, then yes, buying immediately after the secondary is announced is a good time.
Are there foreign exchange risks to a buyer of GTU who is a USA citizen buying in USA dollars and later selling?
Or are all purchases and sales in USA dollars?
Since GTU has outperformed CEF why would someone buy CEF? What are the annual taxes on these funds as a percent of value? I thought taxes were paid only on capital gains upon sale.
http://www.goldstockbull.com/articles/central-fund-of-canada-cef-safest-way-to-own-gold/
I am not well informed in these matters, and in particular I can’t claim to fully understand the arrangement that Central GoldTrust has with its underwriter, CIBC, but here is some public information I have come across online (subject to verification by you from the sources I’m listing) that might be of interest:
1. Around 1/8/09 GTU was trading on the open market at about 39.20, which was a large premium vs. the market price of its underlying bullion and other assets. This figure is obtained by reading the chart for GTU at finance.yahoo.com. The existence of a large premium at that time is just my best recollection, which may be wrong.
Note: The present premium is available on this page:
http://www.gold-trust.com/asset_value.htm
I have not been able to find a page giving a chart of this premium over time. I have seen this premium fluctuate by what I would consider to be fairly large amounts over time, however, so for those asking if the premium is “stable,” I would say that my general impression is that it is not stable. Charting GTU together with GLD should give you some idea that they do not exactly move in tandem. As of this writing, for example, according to Yahoo Finance’s charts, the YTD value of GLD is up 5 percent, while YTD value of GTU is down between 6 and 7 percent. Over two years, we have the opposite divergence: the value of GTU is up well over 50 percent while the value of GLD is just a hair over 40 percent.
2. On 1/9/09 Central GoldTrust announced that “CIBC World Markets Inc. has exercised its right to purchase an additional 148,000 Units at a prices of US$33.83 per Unit.” This press release has been copied in various places, one of which is Marketwire at http://www.smartbrief.com/news/aaaa/industryMW-detail.jsp?id=24FA5ED9-B0D4-45C8-8840-C846CB202BCB. According to the GoldTrust prospectus, “GoldTrust issued 1,123,500 Units at U.S.$33.83 per Unit, for gross proceeds of U.S.$38,008,005, pursuant to a public offering which closed on January 14, 2009. The Units were sold pursuant to a public offering through
GoldTrust’s underwriter, CIBC World Markets Inc. The underwritten price of U.S.$33.83 per Unit for a total of 1,123,500 Units was non-dilutive and accretive to the then existing Unitholders of GoldTrust.”
My own reading of this is that the transaction was “non-dilutive” in that the sale of the units provided sufficient funds to buy bullion at market prices such that the ratio of shares to bullion remained the same as it was before the transaction. However, one might conclude from what happened subsequently that the *premium* associated with the shares apparently *was* “diluted” (i.e., reduced) subsequent to the sale.
3. By the close of trading on 1/9/2009 the publicly traded value of GTU shares had fallen to 34.20 (once again, this is from finance.yahoo.com charts, which I am just reading by positioning the mouse, so check for yourself). It continued to fall to a low of 32.55 around 1/14/2009, after which it rapidly increased in value (once again, I’m reading a graphical chart, and may be a little off, so check for yourself). Perhaps it is a coincidence that it fell fairly close to the price at which CIBC was able to purchase the units – what do you think?
4. Another sale of units was announced on 5/6/2009 at a price of 36.30 per unit. On the preceding day it was publicly traded at 41.87 (the day before that it was at 44.01). By 5/12/2009 it was at 36.62. According to the “Prior Sales” portion of the prospectus, “GoldTrust issued 5,515,000 Units at U.S.$36.30 per Unit, for gross proceeds of U.S.$200,194,500, pursuant to a public offering which closed on May 12, 2009. The Units were sold pursuant to a public offering through GoldTrust’s underwriter, CIBC World Markets Inc. The underwritten price of U.S.$36.30 per Unit for a total of 5,515,000 Units was non-dilutive and accretive to the then existing Unitholders of GoldTrust.”
5. Looking at the GTU prospectus at:
http://www.gold-trust.com/Prospectus/GoldTrust%20Final%20Short%20Form%20Prospectus%20-%20June%208,%202009.pdf
you should be able to find the following section:
“GoldTrust may sell the Units to or through underwriters or dealers purchasing as principals, to one or more purchasers directly
pursuant to applicable statutory exemptions, or through agents designated from time to time by GoldTrust. The Units may be sold
at fixed prices or non-fixed prices, such as: at prices determined by reference to the prevailing price of the Units in a specified
market, at market prices prevailing at the time of sale or at prices to be negotiated with purchasers, which prices may vary between
purchasers and during the period of distribution of the Units.”
and also:
“In connection with any offering of Units, the underwriters or dealers, as the case may be,
may over-allot or effect transactions intended to stabilize or maintain the market price of the Units at levels other than those which
otherwise might prevail on the open market. Such transactions, if commenced, may be discontinued at any time.”
I am not well-informed about such arrangements, and in particular I don’t understand the mechanics of *this* arrangement, but what does seem clear to me is that the underwriter (CIBC) was able to purchase units of GTU for much less than their publicly-traded value at the time. From the subsequent sharp fall in the prices of GTU, one might *suspect* (although I don’t have any information regarding this other than what is in the prospectus) that CIBC turned around and re-sold their shares to the public (as the prospectus seems to be saying they may do). The result would seem to be that persons holding shares of GTU lost significant value, and CIBC gained some significant value through the difference between their own special purchase price and the price that they obtained by selling their shares while the shares were falling, but still above their own purchase price. Some people might call this a de facto transfer of wealth from a privileged party to a less privileged party, while others would say that the two events are unrelated. You may draw your own conclusions by looking at the same, or different, public information.
If the overall impressions I’ve formed are correct, then one might say that the arrangement is really not very different from the kinds of arbitrage arrangements that are a normal part of, say, an exchange-traded fund. When trading gets overheated in such a fund, a party with special privileges allowing it to contribute underlying assets in exchange for shares may exercise those privileges, and then sell the purchased shares to the public, which tends to bring values back in line with the underlying assets. That privileged party realizes a benefit through arbitrage as a reward for its efforts in maintaining the relationship between share prices and the value of underlying assets. This is another example of the general rule that when a privileged party receives a benefit at the apparent expense of less privileged parties, they are deserving of that benefit – in this case, because of the contribution they make to price stability. And so, this is the best of all possible worlds.
The difference, as I see it, is that funds like GLD are arbitraged more consistently, so that they tend to track the market price of the underlying metal fairly closely, while GTU fluctuates fairly rapidly and seems to be “arbitraged,” if you want to call it that, only once it reaches a fairly substantial premium above underlying assets. So, price stability does not obviously benefit from such arrangements, except perhaps over a very long interval. But that is like saying that an ocean wracked by storms nonetheless maintains a certain average level.
Much of the discussion I’ve read about GTU (including on this page) implies that people are paying a premium for it over what they might pay at an ETF such as GLD based upon a fear that the underlying assets (for these more consistently-arbitraged funds that track market values more closely) are “paper,” or have been “lent out,” or are otherwise different and less substantial than having the hard, cold yellow stuff under lock and key. They may or may not be correct in those suspicions, but if they bid up the value of “the real thing” based upon that expectation, then even if an underwriter with privileges not available to the public can come in and buy these shares for the current going price of the metal and them resell them publicly, diminishing, in the process, the traded prices of shares, other shareholders will still own just as much gold as they thought they did when they got into the fund, so if they really thought that it was worth the premium then one can’t say that they’ve been treated unfairly, can one? Although it may be that some parties were perhaps treated *more* fairly.
The problem, if there is one, would be that some people may jump into the fund just because it is going up, not realizing that it could be brought down to earth by factors other than open market operations and the value of the underlying assets as perceived by those who, like themselves, are publicly trading in the fund. Or, conversely, that some people, when they see a large number of shares suddenly entering the market, driving prices down, will panic and sell their own shares, possibly at a loss.
Although these are my sincere and true impressions, and although I’ve followed GTU with interest for a number of months now, I really am not knowledgeable in this area, or in finance in general, and so you should take everything I’ve said here with a substantial grain of salt, and form your own impressions by checking the related information and thinking through these issues yourself.
Although I have never owned GTU myself, I would probably consider buying it if its premium were to be reduced to zero or lower.
I’ve been engaged in taxations for longer then I care to admit, both on the individual side (all my employed life history!!) and from a legal stand since passing the bar and following tax law. I’ve rendered a lot of advice and righted a lot of wrongs, and I must say that what you’ve put up makes complete sense. Please persist in the good work – the more people know the better they’ll be outfitted to deal with the tax man, and that’s what it’s all about.