I am not a kook

2016-03-04 5pm EDT  |  #gold #Central Fund #CEF #Blackrock #IAU #


I have a confession to make. This morning a ZeroHedge headline got me excited. Usually his end of the world tweets merely cause a cynical sneer, but when I saw Tyler Durden’s reporting about Blackrock suspending the issuance of gold trust shares, I thought to myself: this is it!


This is the moment where the delicate imbalance between paper gold demand and physical gold finally jumps to the front of investor’s consciousness.

Yet sadly, once again, the reality of the situation was not nearly as dire as ZeroHedge’s headline. The truth of the matter was Blackrock suspended the issuance of their gold ETF product, not because of a lack of physical gold, but instead because Blackrock had failed to file the proper paperwork with the SEC to issue enough news shares. From Blackrock’s press release:

Since the start of 2016, in response to global macroeconomic conditions, demand for gold and for IAU has surged among global investors. IAU has $8 billion in assets under management, and has expanded $1.4 billion year to date. February marked its largest creation activity in the last decade.

This surge in demand has led to the temporary exhaustion of IAE shares currently registered under the ‘33 Act. We are registering new shares to accommodate future creations in the primary market by filing a Form 8-K to announce the resumption of the offering of new shares.

Don’t get me wrong - this is still good news for the price of gold. It just wasn’t game changing news. Someday there will be a headline about a failure to deliver physical gold, and instead of being up $20 on the day, the price of gold will be up $200.

I am not a kook

Before you write me off as some sort of gold bull kook, stop and think about the Blackrock news. In the space of two months demand for gold has exploded so far past expectations, Blackrock did not have the proper paperwork filed. They are in the business of issuing ETFs. Not being able to issue ETFs is not part of their plan.

Gold is not a big market. Changes in sentiment, and more importantly changes in Central Bank allocations, can cause a huge swing in price. I won’t drone on about all the reasons I am long gold, but instead will present an idea on how to get long at a discount…

How about something other than GLD or IAU?

Many investors who want exposure to gold buy either the GLD or IAU ETF. These ETFs hold the physical gold in some sort of secure segregated vault. If I remember correctly, at one point in 2010, the GLD ETF was the number one holding amongst hedge funds (either that or it was number two behind AAPL).

These ETFs do a good job at tracking the price of physical gold. There are some investors who worry about the underlying assets being part of the US financial system, but otherwise it is difficult to find any problems with these products.

What if I told you?

But what if I told you that there was another product where you could buy gold and silver at a discount, and the physical assets were held outside the US banking system?

The Central Fund of Canada (symbol CEF US Equity) is a closed end fund that has been around for decades. Its only asset is gold and silver. There is no redemption feature so it’s traded value varies with market sentiment.

Given the inability to arbitrage discounts, it is no surprise CEF currently trades at a discount to NAV (net asset value).

CEF is currently at an approximate 7.5% discount to the underlying assets, which is right in line with the average of the past few years.

So what?

At this point you are probably saying to yourself “so what? There are tons of closed end funds trading at a discount.” Ahhhh… but most closed end funds trade at perpetual discounts. The Central Fund is unique in that it has spent a lot of its life at a premium to NAV. Let’s have a look at the chart over the past few decades:


Obviously the great gold bear market of the past few years has led the discount to widen, but during the period from 2000 to 2013, Central Fund averaged closer to a 5% premium.

Although I am not forecasting that premium to immediately return, at the very least the discount to NAV might narrow as sentiment improves.

Blackrock is currently running out of shares to issue, but investors are missing chances to buy physical gold and silver at a discount.

As this bull market in precious metals progresses, that discount should disappear. So instead of waiting for Blackrock to file the necessary paperwork, why don’t you instead pick up some CEF and earn an extra 7.5% as investors figure this out.

And if something should happen with either a failure to deliver, or a worry about the safety of gold within the US financial system, well then - the 30% premium to NAV that CEF traded at the beginning of the 2001-2011 bull market might be seen again. Not predicting that, but not ruling it out either.

Thanks for reading and have a great weekend,
Kevin Muir
the MacroTourist