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.

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.