An intriguing gold/silver play: Central Fund of Canada

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fredflinstone
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An intriguing gold/silver play: Central Fund of Canada

Post by fredflinstone » Fri Dec 05, 2014 8:02 am

CEF (Central Fund of Canada) is a closed-end fund that owns physical gold and silver. Yes, it has actual bullion stored in a vault somewhere. I have followed the company off and on for about 5 years but have not owned it in quite some time. Usually the fund trades at a premium of 5-10% to its Net Asset Value but it is currently trading at a discount of 10%. The expense ratio is very low (0.32%), and the fund has been around for a long time.

Typically, when this fund trades at a discount or at a low premium it means that retail investors are bearish on gold, which is a bullish signal because retail investors are often wrong (contrary indicator).

If the price of gold rises, CEF shares should benefit twofold: first from a narrowing discount to NAV and second from the rise in the underlying NAV. I have never seen this fund trade at such a large discount. Even if the price of gold merely stays flat, CEF shares should appreciate because a discount of this size is unlikely to persist forever IMO.

The fund is down more than 50% in the last ~3 years, significantly more than GLD:

https://www.google.com/finance?chdnp=1& ... qAGFooHoDg

If you've been wanting to own some gold and silver, give CEF a close look.

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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Grt2bOutdoors » Fri Dec 05, 2014 8:06 am

What makes this play more different than say owing BHP Billiton or Freeport McMoran Copper and Gold? CEF is a closed-end fund, the other two are public companies? There are no er's for the latter two once you pay the initial commission.
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fredflinstone
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by fredflinstone » Fri Dec 05, 2014 8:13 am

"What makes this play more different than say owing BHP Billiton or Freeport McMoran Copper and Gold? CEF is a closed-end fund, the other two are public companies? There are no er's for the latter two once you pay the initial commission."

those are mining companies and this fund simply owns bullion. So, quite different.

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Re: An intriguing gold/silver play: Central Fund of Canada

Post by lazyday » Fri Dec 05, 2014 8:31 am

Some time ago I owned closed ends when they traded at a big discount, such as 20% or more. For me, a major part of the appeal was that the dividend was effectively levered up by the discount.

This fund pays almost no dividend. So if the discount does not shrink over time, there is little or no benefit.

Even without the closed end structure, I prefer miners because of the income. Historically, miners has outperformed bullion, and I believe provided more diversification benefit to a stock and bond portfolio because of the high volatility.

Interesting idea though, I didn't know about this fund.

Johno
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Johno » Fri Dec 05, 2014 10:52 am

Gold miners and gold bullion are not the same investment. I'm not saying either is a good or bad investment for any given investor or % of their portfolio, but they are different, though related.

The most direct comparison to Central Fund of Canada is ETF's like GLD and IAU for gold and SLV for silver, which all just basically have you pay a small fee for them to store physical bullion on your behalf. GLD's and IAU's ER's straddle that of Central Fund (.4 and .25 v .32), SLV's is higher (.5). Central Fund is of course a two in one gold and silver fund (recently 61.5 gold, 38 silver, .5 other) whereas one might just want one or the other. But, there's no fundamental reason IMO for Central Fund to be at a discount, it's often been at a premium, unlike many closed end funds where opaque and complicated investment strategy and/or relatively high ER mean they'll usually be at a discount unless they somehow become the darlings of investors for awhile (and then it's probably time to get out!).

I agree the main attraction of closed end fund discounts is where the discount levers up the distribution compared to what you actually invested, which in case of credit risky fixed income CEF's is often enough to largely offset the ER, then a periodic excursion to a narrow discount or premium offers an opportunity you wouldn't have in an ETF of similar portfolio, and a periodic widening of discount isn't a problem if it's something you're in it the for long run, anyway risk and return.

But still I think Central Fund's current discount offers an opportunity you don't get with the gold/silver ETF's because there's no reason it won't eventually narrow. So I'd say it's the superior choice to the precious metals ETF's for the physical/paper form of investing (they hold physical, give you paper; as opposed to they also hold a paper interest in gold, like futures), as long as the gold/silver mix doesn't dilute one's investment goal too much (maybe at the moment many investors feel so, and that explains the discount). Other choices might be direct paper interest in gold (go long the futures yourself), or direct physical (coins you hold). Again I don't have a problem with gold miner stocks investments but IMO it's not the same thing.

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Re: An intriguing gold/silver play: Central Fund of Canada

Post by TheTimeLord » Fri Dec 05, 2014 11:12 am

Grt2bOutdoors wrote:What makes this play more different than say owing BHP Billiton or Freeport McMoran Copper and Gold? CEF is a closed-end fund, the other two are public companies? There are no er's for the latter two once you pay the initial commission.
Over the past year or so I believe Freeport diversified in oil so not a pure play and I think they are more copper than gold.
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lazyday
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by lazyday » Fri Dec 05, 2014 11:16 am

One thing to consider is the risk that the fund will become less shareholder friendly over time. I haven't looked into Canadian closed ends; maybe they have better laws protecting shareholders, or shareholders that don't vote against their own interest.

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Re: An intriguing gold/silver play: Central Fund of Canada

Post by nimo956 » Fri Dec 05, 2014 11:19 am

On April 15th 2013, gold fell like 10% in a single day. From that day forward, CEF and GTU have been selling at a discount instead of a premium. I'm not sure why, over 1.5 years later, they are still selling at a discount. If you thought then that you could make a quick buck by waiting for the funds to sell at a premium, then you will have been waiting for a long time.
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Grt2bOutdoors » Fri Dec 05, 2014 12:22 pm

TheTimeLord wrote:
Grt2bOutdoors wrote:What makes this play more different than say owing BHP Billiton or Freeport McMoran Copper and Gold? CEF is a closed-end fund, the other two are public companies? There are no er's for the latter two once you pay the initial commission.
Over the past year or so I believe Freeport diversified in oil so not a pure play and I think they are more copper than gold.
That's accurate - they bought PXP - Plains Exploration & Production and McMoran Exploration and they are just settling a lawsuit brought against them for self-dealing whereby they negotiated a purchase price that was influenced by management of the purchaser who were wearing two hats at the same time, that of the buyer and the seller. Now they have to fork over 10 cents per share to outside shareholders of FCX. That is the problem when dealing with companies that lack good self-governance.

BHP also holds petroleum interests.

Both companies are not pure plays, but they do hold considerable gold reserves in the ground. Now they are both being impacted by the fall in oil. They are more of a commodities play and less of a pure precious metals miner.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

FuzzyButtons
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by FuzzyButtons » Fri Dec 05, 2014 12:38 pm

Agreed that this discount (along with the 10% discount in the all-gold sister fund GTU) has been present for a long time, and is likely to continue as long as the look for gold is bearish. However if you plan to own gold in your portfolio for the long term and are currently looking to purchase a fund to serve that purpose, this merits consideration.

One thing to be wary of if you live in the US is the tax implications. The IRS considers this fund a Passive Foreign Investment Company (PFIC). While gains in this fund are considered capital gains and can benefit from the lower tax rate that implies (vs an ETF like GLD that is taxed as a collectible), there are additional reporting requirements to the IRS because of its nature as a PFIC. IRS form 8621 is required, and my understanding is that this can be quite complex to calculate. This can be avoided by purchasing shares inside a tax-exempt or tax-deferred account.

Fair warning - I'm not a tax or PFIC expert. This is just what I've gathered from research I did before purchasing $5k of GTU last month within my traditional IRA. Hopefully I did it right. :D

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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Castanea_d. » Fri Dec 05, 2014 9:52 pm

I have owned shares of CEF since I first decided to have some holdings in gold/silver – at almost exactly the wrong time, early in 2011. I started small with the idea of dollar-cost averaging, and that proved to be a good approach. I switched to Value Averaging about a year ago, and that has been better still. Overall, I am currently in the red by about 25%, and still not quite to my intended allocation.

I looked also at the Sprott funds (PHYS and PSLV). CEF seemed better to me as a long-term holding because the expense ratio is about half of what it is for the Sprott funds, CEF has been around for a long time, and it seems to have very stable governance/management. And it is simple; all they do is hold physical gold and silver bullion, with a small amount of cash for expenses.

As FuzzyButtons wrote, you have to pay attention to the tax ramifications unless it is in a retirement account; I have it in my Roth.

I also have a smaller amount of money invested in VGPMX, the Vanguard Precious Metals and Mining fund; I like that too.

One of my reasons for wanting gold/silver in my portfolio is that they have at times had a low correlation to equities. That has certainly been the case recently with equities up/metals down. We shall see what happens when the equity markets turn downward someday.

(Footnote: I have been lurking on Bogleheads for some time and decided to go ahead and register today. This is my first post, and I send my greetings to everyone. I am glad to finally be part of this.)
Last edited by Castanea_d. on Sat Dec 06, 2014 8:52 am, edited 1 time in total.

Valuethinker
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Valuethinker » Sat Dec 06, 2014 6:36 am

Castanea_d. wrote:I have owned shares of CEF since I first decided to have some holdings in gold/silver – at almost exactly the wrong time, early in 2011. I started small with the idea of dollar-cost averaging, and that proved to be a good approach. I switched to Value Averaging about a year ago, and that has been better still. Overall, I am currently in the red by about 20%, and still not quite to my intended allocation.

I looked also at the Sprott funds (PHYS and PSLV). CEF seemed better to me as a long-term holding because the expense ratio is about half of what it is for the Sprott funds, CEF has been around for a long time, and it seems to have very stable governance/management. And it is simple; all they do is hold physical gold and silver bullion, with a small amount of cash for expenses.

As FuzzyButtons wrote, you have to pay attention to the tax ramifications unless it is in a retirement account; I have it in my Roth.

I also have a smaller amount of money invested in VGPMX, the Vanguard Precious Metals and Mining fund; I like that too.

One of my reasons for wanting gold/silver in my portfolio is that they have at times had a low correlation to equities. That has certainly been the case recently with equities up/metals down. We shall see what happens when the equity markets turn downward someday.

(Footnote: I have been lurking on Bogleheads for some time and decided to go ahead and register today. This is my first post, and I send my greetings to everyone. I am glad to finally be part of this.)
Perhaps you also want to post a hello on the Forum Issues board? It will get clocked there by more "people who matter".

Let me express the general sentiment of congratulations and welcome. There is always something to be learned here.

Valuethinker
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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Valuethinker » Sat Dec 06, 2014 6:36 am

For American investors.

Does owning a Canadian Closed End Fund (CEF) cause you particular tax headaches?

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Re: An intriguing gold/silver play: Central Fund of Canada

Post by Valuethinker » Sat Dec 06, 2014 6:40 am

Grt2bOutdoors wrote:
TheTimeLord wrote:
Grt2bOutdoors wrote:What makes this play more different than say owing BHP Billiton or Freeport McMoran Copper and Gold? CEF is a closed-end fund, the other two are public companies? There are no er's for the latter two once you pay the initial commission.
Over the past year or so I believe Freeport diversified in oil so not a pure play and I think they are more copper than gold.
That's accurate - they bought PXP - Plains Exploration & Production and McMoran Exploration and they are just settling a lawsuit brought against them for self-dealing whereby they negotiated a purchase price that was influenced by management of the purchaser who were wearing two hats at the same time, that of the buyer and the seller. Now they have to fork over 10 cents per share to outside shareholders of FCX. That is the problem when dealing with companies that lack good self-governance.

BHP also holds petroleum interests.

Both companies are not pure plays, but they do hold considerable gold reserves in the ground. Now they are both being impacted by the fall in oil. They are more of a commodities play and less of a pure precious metals miner.
BHP really isn't a gold play in market terms?-- I wasn't even aware they produced gold. Iron Ore is the biggie in terms of the share price (coal also?). It's mostly a play on Chinese economic growth.

I have this thought that Rio will spin off Alcan, surely the most disastrous mining acquisition of the last 20 years, and then BHP will have another go at a merger. If you saw what happened when the German utility EON announced a spinoff of its distribution & renewables side (or is it the generation side? In any case, a split) the share price rose. It surely (am I the only person who immediately thinks 'stop calling me Shirley?' ;-)) must occur to the Board of Rio and some of the activist hedge funds that something similar would happen with Rio.

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