A new self-governing gold trust being set up in Canada will make investing in gold bullion as easy as calling a stock broker or placing an order over the Internet. The Central Gold-Trust, to be traded on the Toronto Stock Exchange, will be the first gold-only, exchange-traded investment vehicle in Canada. The intention is to provide investors a way to invest in gold bullion in a secure manner without the associated inconvenience and costs of holding physical gold directly.
Another important aspect is that the Central Gold-Trust will be RRSP eligible.
While gold has been an excellent hedge in the past three years against declining stock prices, Canadians are not allowed to hold gold bullion in their RRSPs. They are restricted in their RRSPs at present to mutual funds that are not pure gold plays or to shares of gold mining companies, which don’t always track movements in the price of gold.
Most precious metals mutual funds are focused on holding the shares of companies mining gold, silver and other precious metals, although the shares are sometimes combined with physical holdings of gold or gold certificates. An exception is the Millennium BullionFund (www.bullionfund.com), an open-ended mutual fund which invests only in gold, silver and platinum bars and nothing else.
Investors have been able to get a partial stake in gold bullion with the RRSP-eligible Central Fund of Canada Limited, traded on the Toronto Stock Exchange under CEF.A and in New York on the American Stock Exchange under CEF. This fund (www.centralfund.com), which was established in 1961, holds a combination of gold and silver bars.
The creation of the Central Gold-Trust comes at a time when there is greater worldwide demand for a stock exchange-traded form of gold. Another gold-only investment product was brought to market in Australia this spring. The World Gold Council, a trade group based in New York, is in the process of preparing a prospectus for a similar gold-only product to be traded on one of the New York exchanges.
The impetus comes mainly from gold’s stellar price performance in the face of declining stock prices and the U.S. dollar. But these exchange-traded funds also represent a less expensive way to hold gold. To own gold bullion bars directly, investors have to pay significant transaction, storage and insurance costs, and large amounts are often subject to additional assay costs.
Gold certificates from a chartered bank are an alternative that reduces some of these costs, although one problem with certificates is that there is no assurance the bank either owns the gold or will be able to deliver the gold in physical form if put to the test, especially in an economic crisis.
Investors can also invest in gold coins, such as the Maple Leaf gold coins available in Canada. However, these are usually priced at a significant premium to underlying gold value, have a wide bid-offer spread, and there is a sales tax upon purchase in most provinces that adds to the cost.
The Central Gold-Trust will not be without its own costs, although these will be less than owning gold bullion or coins directly. The most obvious are the brokerage fees associated with buying or selling the trust on the stock exchange. Also, the administrator of the trust, which is associated with the group running the Central Fund of Canada, will be paid an annual fee of 0.4% on the first US$100 million of gold held in the trust, 0.3% on the next US$100 million, and 0.2% on any amount over US$200 million.
The trust, which is expected to be available for trading in June under the symbol CGT.UN, will be backed at least 90% by 400-ounce bars of gold and the remainder will be in cash or short-term debt securities. The bullion will be “unencumbered,” which means that the Trust will not lend out the gold or engage in derivatives, such as writing call options against it. These rules are in place to ensure that the trust’s gold holdings are not negatively affected by any financial crisis that may occur.
One thing investors will have to keep in mind is that the trading price of the trust on any given day may not be exactly equal to the underlying net asset value (NAV) of the trust. Since there will be a limited number of shares outstanding, swings in sentiment could push the price on the stock exchange higher or lower than the NAV. For instance, the trading price of Central Fund of Canada, another closed-end fund, has been as much as 33% higher than the underlying NAV at times of overwhelming bullish sentiment for gold and at discounts at times of negative sentiment.
Another thing to consider is that the traded price of the trust will be subject to fluctuations in the Canadian dollar. While the underlying gold holdings will be priced in U.S. dollars, the trust’s units will trade on the TSX in Canadian dollars.
Details of the trust are available in the prospectus at www.sedar.com. A website, at www.gold-trust.com or www.goldtrust.ca, will become operational once the initial public offering is completed.
Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. He can be contacted at wcheveldayoff@yahoo.ca.
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©2003 Wayne Cheveldayoff