CEF and GTU

[raja]

I bought the Canadian gold/silver fund CEF and the Canadian gold fund GTU six days ago.

I bought 3 times as much CEF as GTU, and for a few days CEF showed 3 times the earnings of GTU, as one might expect. Yet now GTU shows earnings 15% higher than CEF. Does anyone know why this is?

I thought it might be the silver component, but the SLV and the GLD chart look almost the same.

I read that the premium on CEF went down, but I've been looking around and can't find info on the premium, or how it would affect price.

Any insight on this price difference would be appreciated . . . .

[Jim Nickerson]

I bought the Canadian gold/silver fund CEF and the Canadian gold fund GTU six days ago.

I bought 3 times as much CEF as GTU, and for a few days CEF showed 3 times the earnings of GTU, as one might expect. Yet now GTU shows earnings 15% higher than CEF. Does anyone know why this is?

I thought it might be the silver component, but the SLV and the GLD chart look almost the same.

I read that the premium on CEF went down, but I've been looking around and can't find info on the premium, or how it would affect price.

Any insight on this price difference would be appreciated . . . .


Raja, look at etfconnect.com and put in the symbols to see yesterdays premiums.

Prices will fluctuate and not always in synchrony with whatever might be reality.

I own a bit of GTU outside of IRA and the striking thing about it to me is that is trades on very low volumes, but I am thinking (hoping) it is a bit safer than GLD.

[idianov]

Raja,

CEF has 50% silver bullion in it. Silver has been underperforming gold, so CEF has been lagging the pure bulion GTU. GTU is thinly traded, but the volume is picking up compared to year ago.

Go to www.centralfund.com for daily NAV and premium information.

The premium is a sentiment indicator. The bullish case for CEF lower premium is that market is worrying too much about gold and silver prices while climbing a wall of warry. The bearish case is that silver demand will drop during KA, and so the CEF NAV. However, CEF is much less voilatile than its SLV proxy.

If you look at the recent history of CEF, premiums higher than 10% were used to issue more shares to buy more gold and silver bullion on the open market. COMEX Siver shorts do not like it much. :)
Looks like GTU is structured like CEF, so you can expect the same thing to happen to it if premium goes too far above NAV.

Igor

[dbarberic]

I also own CEF and brought up the premium in another thread. Someone rationalized that the premium represents the fact that CEF for tax purposes is treated like stock and receives stock capital gains treatment (long term holding is at 15%). GLD and SLV are treated like holding bullon and are taxed at standard income tax rates.

Not sure how GTU is treated.

Seems to make sense, but I'm not sure if it fully explains the premium.

[raja]

Thanks for your responses.

I'm still not clear what premium is . . . .

Is this an amount charged by the company when you buy shares? Is it a one time payment?
Does the buyer pay the cost of the shares, plus the premium?

Does the company lower the premium in order to induce more purchasing of shares?

When one is buying a stock, how does the premium figure into the buying decision?

Thanks for some education on this!

[idianov]

Raja,

Premium/discount is the difference between market price of CEF shares on the stock exchange and the share price of bullion holdings in CEF vault at spot prices. There is also exchange rate variable between CAD/USD because CEF shares also trade in CAD on TSX.

There is no rationale at how much premium/discount should be priced in a single share. The buyers/sellers ratio at the margin will determine the premium or discount to NAV.

The CEF management can issue more shares at certain price and sell them on the stock exchange and then use the proceeds buy more bullion. This is not dillutive for existing share owners because the holdings of bullion increase proportinally. They usually do this once a year when the premium gets above 8% to bring the share price down closer to NAV.

Low premium is better than high, of course, because you are buying shares closer to bullion spot prices with only broker comission.

I own some CEF shares in CAD. I do not recommend to buy or sell CEF based on my analysis and observations. DYOD.

[Jim Nickerson]

Raja,

Premium/discount is the difference between market price of CEF shares on the stock exchange and the share price of bullion holdings in CEF vault at spot prices. There is also exchange rate variable between CAD/USD because CEF shares also trade in CAD on TSX.

There is no rationale at how much premium/discount should be priced in a single share. The buyers/sellers ratio at the margin will determine the premium or discount to NAV.

The CEF management can issue more shares at certain price and sell them on the stock exchange and then use the proceeds buy more bullion. This is not dillutive for existing share owners because the holdings of bullion increase proportinally. They usually do this once a year when the premium gets above 8% to bring the share price down closer to NAV.

Low premium is better than high, of course, because you are buying shares closer to bullion spot prices with only broker comission.

I own some CEF shares in CAD. I do not recommend to buy or sell CEF based on my analysis and observations. DYOD.

The degree of a premium's importance is related to whether one is buying or selling. There are those who have long advocated buying CEF's--closed end funds--at discounts and then selling them when there is a premium--if of course that were to occur.

[cobben]

I
I read that the premium on CEF went down, but I've been looking around and can't find info on the premium, or how it would affect price.

Any insight on this price difference would be appreciated . . . .


Closed end funds are subject to manipulation, amd are more volatile then "indentical" open end funds, compare GIM and TPINX.


Here is some theory:

A Liquidity-Based Theory of Closed-End Funds
http://faculty.haas.berkeley.edu/sagi/cef.pdf

This paper develops a rational, liquidity-based model of closed-end funds (CEFs) that
provides an economic motivation for the existence of this organizational form: They offer a
means for investors to buy illiquid securities, without facing the potential costs associated
with direct trading and without the externalities imposed by an open-end fund structure.
Our theory predicts the patterns observed in CEF initial public offerings (IPOs) and the
observed behavior of the CEF discount, which results from a tradeoff between the liquidity
benefits of investing in the CEF and the fees charged by the fund’s managers. In particular,
the model explains why IPOs occur in waves in certain sectors at a time, why funds are issued
at a premium to net asset value (NAV), and why they later usually trade at a discount. We
also conduct an empirical investigation, which, overall, provides more support for a liquiditybased
model than for an alternative sentiment-based explanation.

[dbarberic]

I do not recommend to buy or sell CEF based on my analysis and observations. DYOD.
I do not understand this comment.