The Premiums for CEF and GTU
The daily MIDAS commentary has discussed the extraordinary premiums now being paid to buy the two Canadian Precious Metal Funds CEF (Central Fund of Canada) and GTU (Central Gold Trust). Both of these closed ended funds trade in Canada and the US under similar symbols. They are separate and independent entities with separate boards but there is some overlap in the individuals occupying positions on both funds-with the same President & CEO (Stefan Spicer) and Chairman (Philip Spicer although co chair with John Embry for GTU). The Central Fund of Canada is the much older of the two with a chart below of its Premium/discount history. The chart can be found at:
CEF-Central Fund of Canada Premium/Discount History
As of 2/28/2009
They also include the monthly closing premium/discount history on the same page. Needless to say premiums above 10% are relatively rare.
GTU-Central Gold Trust Premium/Discount History
As of 2/28/2009
Notice the very different Premium/Discount histories. The Central Fund has not traded at a discount (with a very few exceptions) since the current Precious Metal bull market began eight years ago. However, there was a long period of discounts for GTU from approx Nov/2004 until Jan/2008 during which time CEF traded at a premium. GTU was set up in 2003 but by the time all the legal and regulatory issues were cleared up the competing World Gold Council ETF had begun trading and demand for GTU shares fell away. During this period GLD sold for a premium compared to GTU.
There was to have been a Central Silver Trust but this was shelved because of the competition from SLV. The key reason for this is the storage cost for Silver. With the Gold Silver ratio currently around 70 it requires a lot more to ship/store silver than an equivalent Dollar amount of Gold and this would affect a small fund’s expense ratio.
Comparing CEF and GTU with GLD
The first thing to note is how small both the Canadian Funds are. The GLD ETF, as of Mar 19, 2009, allegedly holds 35,471,832 ounces of Gold. GTU has 192,673 ounces of gold bullion and 4,981 Gold Certificates for a total holding of 197,654 ounces. In other words GLD is almost 180 times larger than GTU. The market cap of GTU including today’s premium of 30.9% is only $252,590,250. The market cap of GLD is $34 Billion.
The Central Fund of Canada holds 1,049,328 ounces of Gold and 52,460,793 ounces of silver bullion. It’s market cap including today’s 18% premium is just over $2 Billion.
Just today GLD supposedly added 609,433 ounces to its holdings which is three times the entire size of GTU’s holdings. And in the last week, GLD added 1,985,610 ounces to its holdings which is more than the combined Gold holdings of GTU and CEF accumulated over 25 years.
What do the CEF and GTU Premiums tell us about GLD and about Silver
In today’s Midas Dave from Denver asks:
“why someone would be willing to pay 31% over the NAV of GTU to buy into it vs. not even paying NAV for GLD. (GLD trades below spot to account for the trust expenses). if the two investment vehicles were identical, i.e. they both hold physical gold, an investor should buying GLD instead of GTU. Liquidity does not explain the wide premium to NAV that GTU is experiencing. AND, the premium on GTU somewhat mirrors the actual premium on gold bullion coins as reflected in the market place. If someone could, they would want buy GLD and sell short GTU - but that is not happening (or, since you can't borrow GTU, sell GTU and buy 31% more GLD with it).”
I think the current premiums tells us several things. Firstly, the market is telling us GLD and GTU are not the same. Those holding GTU do not want to trade their shares for GLD. A small segment of the market believes those who argue that GLD is too opaque to touch. But it can only be a small part of the market just by looking at the market caps of the two funds. The GLD sponsors have done a brilliant job in convincing investors that buying GLD is equivalent to buying gold bullion. The ever increasing GTU premium over the past year (see above GTU chart) indicates that a small but growing group of investors doubt this to be true.
Just as interesting is the difference in CEF and GTU premiums. Why is the GTU premium so much greater than that of CEF? Why don’t GTU share holders sell and buy CEF instead? Recall that earlier this decade the situation was reversed. Silver was then outperforming gold and that was reflected in the premiums.
This can only be answered in reference to the under performance of silver over the past year. On March 19th 2008 Gold closed at $942 slightly below today’s close of $958.30. Silver, however, has dropped from $18.49 last year to $13.52 today which is a 27% loss. As I mentioned earlier, the Central Silver Trust which had been planned was aborted because of the high cost of moving and storing silver. Despite arguments to the contrary the rising Gold/Silver ratio is telling us that Gold and only Gold is money. Silver cannot compete for the very simple reason that it costs so much more to ship and store an equal value. A million dollars of gold weights 65 pounds but a million dollars of silver weighs 2.3 tonnes!
The Central Fund of Canada holds silver in the ratio of 50 ounces to each gold ounce. The market has moved away from that ratio to 70 to one. If we look at today’s closing prices and premiums and valued the gold in CEF at the same premium that GTU enjoys (30.9%) then its 1,049,328 gold ounces would have a market cap of $1,313,820,488. But the total market cap of CEF today (including premium of 18%) was $2,052,198,350. The difference is $738,377,862 and this is the value assigned to silver in CEF which is a 7% premium to its spot price today of $688,810,213.
Since the beginning of 2009 Silver has outperformed Gold. If this continues and I’m right, then the GTU/CEF premium should narrow and move in CEF’s favor. Silver may not be money but it may be the better investment.
Cheers from Auckland, Ed Wener
ed.na@xtra.co.nz
Ok. Lets start with economic news of the day: Yesterday the Dow fell by 122 points as financials were hit hard. JPMorgan came out and stated that they see now sign of any change in the financial climate. The market for the past two weeks saw a 15% gain on words that Citibank and Bank of America were going to show a profit in the first quarter. JPMorgan saw its share price fall by
This stunned the street. They do not know who to believe.
The announcement by Berbanke that he is going to purchase 300 billion dollars of long term treasuries and then another 1.45 trillion of mortgage-backed securities sent a chill down the markets.
As the Fed buys up the long end, he is flattening the yield curve and killing all hopes of bank profits. This is one commentary from a cafe member:
TOO BIG TO BAIL
It has been my extensive long held view that the mess created by The Gold Cartel and financial institutions in the US is too big to bail. Thus, I have repeated that slogan over and over for many months. The latest moves by the Fed suggest that notion is gaining steam in the investment world. Note what Bill King wrote last night to his followers…
Stocks sank, led by financials. How can this be? Because the Fed’s dubious monetization strategy flattens the yield curve, which reduces bank and financial firms’ profits.
So while Weimar Ben applies his theories on averting deflation by trying to re-inflate dead and decaying assets, the income statement side will deteriorate.
Secondly, investors fear that Ben’s quick trigger of the nuclear option implies there is something gravely wrong in the system.
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With quantitive easing the norm throughout the world, it is quite easy to understand the movement into gold. Yesterday in one day, the gold ETF GLD added 18.96 tonnes
The GLD ETF added a healthier 18.96 tonnes to a new record.
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GLD has added 80 tonnes of gold in one week and over 350 tonnes of gold from the beginning of the year. The ECB has been selling approximately 6 tonnes of gold per week.
I wonder who is providing all of the gold?
As for the deficits, the CBO posted its projected 2009 deficit. They now state that the 2009 the deficit will exceed 1.8 trillion dollars and 2010 will exceed 1.4 trillion dollars:
Bank stocks
U.S. economic news:
U.S. CBO REVISES BUDGET DEFICIT UP TO $1.8 TRILLION FOR FY2009-SOURCE
U.S. CBO REVISES BUDGET DEFICIT UP TO $1.4 TRILLION FOR FISCAL 2010-SOURCE
Washington Post.com
News Alert
1:55 p.m. ET Friday, March 20, 2009
U.S. Federal Deficit Soars Past Previous Estimates
Deteriorating economic conditions will cause the federal deficit to soar past $1.8 trillion this year and leave the nation wallowing in a sea of red ink far deeper than the White House had previously estimated.
It looks like GM and Chrysler are going to need more dollars to fix their problems:
GM, Chrysler May Need ‘Considerably’ More Aid, Rattner Says
March 20 (Bloomberg) -- General Motors Corp. and Chrysler LLC may need "considerably" more government aid than their request for as much as $21.6 billion, said Steven Rattner, the U.S. Treasury’s chief auto adviser.
"It could be considerably higher, I won’t deny that," Rattner said, when asked whether U.S. aid sought could rise to $30 billion or $40 billion. Rattner spoke in an interview on Bloomberg Television’s "Political Capital with Al Hunt," scheduled to air today…
http://www.bloomberg.com/apps/news?
pid=20601087&sid=ajvc.HUwoK44&refer=home
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Leon Black of Apollo, commented yesterday that the next black hole is the commercial property market and he states that this will add an additional 2 trillion dollars of losses to the banks.
I have also written about this in previous commentaries:
17:58 Apollo's Leon Black warns of commercial property "black hole" - FT
In an interview with the FT.com, Leon Black, the founder of the private-equity firm Apollo, says that a "black hole" in the US commercial property market is set to exacerbate the problems for troubled banks. According to Black, the additional costs of cleaning up the US banking industry could total as much as $2T.
Reference Link (subscription required)
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There is strong evidence that China is buying huge supplies of raw materials and storing them on their shores. This is why oil has shot up as well as copper and other metals:
Here is a commentary from a cafe member:
Here it is - evidence supporting a key factor in my recipe for hyperinflation. China is using its massive foreign reserve surplus of US dollars to scoop up huge stockpiles of raw materials. This is an enormous transfer of resources from the West to the East, financed by the mad men running our country. Eventually the global glut will turn into global scarcity and there will be trillions of dollars sloshing around the system looking for necessities, driving prices to unthinkable heights:
As the U.S. and Europe continue to slide commodities should fall, but Chinese buying is buoying commodities instead, creating global stagflation. Western consumers have less money, but prices rise anyway.
The massive size of China’s purchases has swayed energy markets. It also has sparked concern that China will hoard commodities, lifting their prices and making them unavailable to other countries, including the United States.
http://moneynews.newsmax.com/streettalk/
china_foreign_buying/2009/03/19/193729.html
Printing money in the history of the world has NEVER worked to solve economic problems. Ben Bernanke is borderline retarded. Now he's a retard with a finger on the printing press - a financial nuclear weapon.
Please start accumulating gold and silver bullion before the Chinese snatch up the remaining stock of precious metals. It will be your ONLY protection from the financial tyrants looting our system and destroying our country.
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This is why we are heading for a hyperinflationary depression as goods disappear in a lousy economy. The purchase of long end bonds will eliminate any hope of a banking recovery.
The world is devaluing together preventing a run on any country. However it creates a run into silver and gold
speak to you on Monday
Harvey.
