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Investing in gold bullion made easier with new gold ETF listed on the NYSE

by Wayne Cheveldayoff, 2004-12-23

With the recent listing of a new exchange traded fund (ETF) for gold on the New York Stock Exchange, Canadian investors now have an easy way to invest in gold bullion – inside or outside of their RRSPs.

RRSP rules prohibit the direct holding of gold bullion. But since the gold EFT is traded like a company stock on a recognized North American exchange, Canadian investors can tuck away as many of the gold ETF shares as they want in their self-directed RRSPs, subject to the 30-per-cent limit on foreign holdings.

All it takes to own gold bullion in this way is a call to your full-service or discount broker (or a click of a computer mouse if you are set up for Internet trading).

Each share of the new gold ETF (symbol GLD on the NYSE) represents one-tenth of an ounce of gold and the ETF is properly structured to ensure the price of the shares closely tracks the price of gold bullion with no significant discount or premium.

If the spot price of gold is US$450 per ounce, each GLD share will be US$45 (possibly give or take a few cents for a few minutes until the arbitragers narrow in the difference).

The gold ETF is formally known as Streettracks Gold Trust (details at www.streettracksgoldshares.com). The main custodian holding the gold is HSBC Bank, one of the world’s largest banks.

The gold ETF is a great trading vehicle for those interested in speculating on short-term swings in the price of gold, or it can be used for long-term investing.

With the annual management fees for the ETF only around 0.4 per cent, investors would actually be saving on the insurance and storage costs of holding gold bullion directly.

A key positive feature of the gold ETF is the absence of significant discounts or premiums to the underlying bullion’s net asset value that investors in closed-end funds face.

For instance, it has been possible for some time to invest in gold, or a combination of gold and silver, by owning the shares of two closed-end funds in Canada that hold bullion.

Central Fund of Canada (CEF.A on the TSX, www.centralfund.com), a closed-end trust holding bold and silver, has been around several years. The gold-only Central Gold Trust (GTU.UN on the TSX, www.gold-trust.com) was established in 2003.

However, the units of these closed-end funds can trade at any point in time at a significant discount or premium to the net asset value of the underlying bullion. If there is a major seller of shares in the market, the shares could be trading at a discount of 5 to 10 per cent. If demand for the shares is high, they could be at a similar premium.

The ETF structure eliminates the possibility of such large premiums or discounts developing. This is because of the ability of market-making brokers to arbitrage out differences by moving gold into or out of the ETF as needed.

For investors, if gold is up 5 per cent, you are going to see the value of the ETF shares also up 5 per cent. The ETF shares will definitely track the underlying gold bullion price.

The discount-premium problem is also avoided with the only bullion mutual fund offered in Canada. Millennium Bullion Fund (www.bullionfund.com), which invests equally in the revered precious metals trio – gold, silver and platinum – prices its units each day precisely according to the closing value of the bullion.

In fact, while it is not advisable to concentrate holdings in such a way, Canadian investors can fill their RRSPs 100 per cent with bullion. While the gold ETF is deemed to be foreign content, the two central funds, since they are traded on the TSX, are RRSP-eligible as Canadian content.

The Millennium Bullion Fund is also considered Canadian content for RRSPs since the underlying bullion is stored in Canada.

Precious metals are currently in a long-term bull market triggered by insufficient production after years of depressed conditions and the deficit-induced slide in the U.S. dollar. With inflation possibly heating up, investors should consider allocating 5 to 10 per cent of their portfolios to bullion.

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. His columns are archived at www.smartinvesting.ca and he can be contacted at wcheveldayoff@yahoo.ca.

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©2004 Wayne Cheveldayoff