What's the Scoop on CEF

[qwerty]

Down 12% because of an underwritten offering.

CEF always traded at a premium over its actual holdings. Is this simply a case of that premium being blown away by a forced "mark-to-value" by the underwriters?

If so, CEF now excellent value as means of buying gold and silver?

Can anyone confirm please?

[Tulpen]

Is this simply a case of that premium being blown away by a forced "mark-to-value" by the underwriters?

No. Since CEF is effectively a closed end fund, the premium (or discount) is simply a consequence of supply and demand.

[sadsack]

Drawing on comments in the past by other members, I understand the premium to NAV has typically hovered around 5%. When new shares are offered, this usually reduces the premium to 1-2%.

As of yesterday, the premium was 23%! This is insane. I'm guessing that extreme shortages of retail PM's, coupled with growing skepticism for the security of "paper PM's" (GLD, SLV, etc.) has led to a rush into CEF.

I'd be careful buying in when the premium is over 10%; even 8% is a little rich. A large premium exacerbates the downside risk.

[qwerty]

I think you miss the point.

Say that one share of CEF gets you one 1/100 ounce of gold and 1/10 ounce of silver (it gets you different amounts, but for the sake of this argument ....)

Then the real value of the assets,

V = 1/100 x $880 + 1/10 x $12 = $10

But, say CEF is trading in the market at $12.50.

That means that people are paying a PREMIUM of 25% to own gold and silver via this fund.

But when CEF offer more shares, to buy more gold and silver, they are going to have to offer those shares at near zero premium. This supply of new shares at zero premium will knock the market premium right out.

hence the big drop in the market price for CEF

[qwerty]

Thanks. 25% Wow! I wasn't paying attention when I bought some last.

I think that the premium would be there because CEF paper is better than the ETF's like GLD since they are sitting on real bullion.

Don't you think that a premium of only 5% is not bad - given it's better quality in terms of safety vs ETFs and better liquidity and portability vs bullion?

[sadsack]

Thanks. 25% Wow! I wasn't paying attention when I bought some last.?

The premium has been oscillating wildly in the last few weeks. At one point before the recent PM price surge (2 weeks ago?), it went as low as 1% or thereabouts.


I think that the premium would be there because CEF paper is better than the ETF's like GLD since they are sitting on real bullion.?

There's also the fact that CEF qualifies for favorable tax treatment as a closed end fund; i.e., trading profits are taxed at the capital gains rate, not the "collectables" rate (35% - ouch).


Don't you think that a premium of only 5% is not bad - given it's better quality in terms of safety vs ETFs and better liquidity and portability vs bullion?

I'd be OK with 5-8%, but wouldn't consider it a "deal" unless it's under 3%.

I use CEF as the PM component of my IRA assets for the reasons you list, so yeah - me likey.

Remember that CEF is never 100% invested in PM. There's a cash component that is capped at no more than 10% of NAV. As of yesterday, cash was down to 2.6% of NAV.

So, factor the premium + non-PM holdings, and you're buying less PM for your money. At yesterday's premium + 2.6% cash, you would have been buying less than $0.75 of silver for every dollar of CEF.

With a new share offering, the premium may decrease, but the cash component will increase as well. This could render CEF a little bit less than a "Sterling" (.925) play in PM, at least in the short term until new PM holdings are acquired.

[qwerty]

Thanks - great stuff.

Tax rate: I didn't know it was not treated as a collectible. That is very informative.

Further benefit for IRAs: Another benefit is that the custodians won't be lending my shares out like they might with GLD ETF holdings.

Cash holding: Is it CAN$ though? - If so, another possible bonus at times ;)

Tracking the premium. How do you do it - is it published somewhere or do you do your own research and calculations.

FWIW - I am also thinking of taking delivery of some paper certificates thus cutting out brokerage/custodian risk (this is for non-IRA holdings). I reckon they can always be packed readily along with a passport ... ;)

[zoog]

I also hold CEF in an IRA, a Roth IRA in my case. I haven't paid attention to the premium when I have made purchases. Not sure how to go about calculating it.

In a taxable account I have GTU, which I believe also does not fall under the collectibles tax. At least on the surface, it appears to be structured just like CEF in terms of bullion/cash, but the PM component is only gold, not gold and silver.

I have the same reasons for choosing these funds over GLD, SLV, etc. It sounds like they are more secure, more reliable. All within context of still being "paper gold" of course, lest the goldbugs around here unleash the hounds on me.;)

[sadsack]

Thanks - great stuff.

Further benefit for IRAs: Another benefit is that the custodians won't be lending my shares out like they might with GLD ETF holdings.

Cash holding: Is it CAN$ though? - If so, another possible bonus at times ;)


True, and yes on CAN$.


Tracking the premium. How do you do it - is it published somewhere or do you do your own research and calculations.


I'm not Bart - CEF provides daily audits:

http://www.centralfund.com/Nav%20Form.htm


FWIW - I am also thinking of taking delivery of some paper certificates thus cutting out brokerage/custodian risk (this is for non-IRA holdings). I reckon they can always be packed readily along with a passport ... ;)

For non-IRA holdings, you must annually file a Form 8621 with the IRS. This form qualifies your CEF holdings for preferred tax treatment:

http://www.centralfund.com/pfic/PFIC2007.pdf

[zoog]

True, and yes on CAN$.



I'm not Bart - CEF provides daily audits:

http://www.centralfund.com/Nav%20Form.htm



For non-IRA holdings, you must annually file a form with the IRS (I forget the form number). This form qualifies your CEF holdings for preferred tax treatment:

http://www.centralfund.com/pfic/PFIC2007.pdf

IRS Form 8621 Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Came up one time in Jim's investments thread (http://www.itulip.com/forums/showthread.php?p=26384&highlight=form#post26384).

[qwerty]

Ah - ha. Premium posted daily on CEF website. Thanks.

Now, this Form 8621 - that's only for when you wish to declare dividends, and get some tax break on foreign tax withholding, right?

If you don't do that, you just pay the tax on it like a regular dividend, yes?

BTW - How come they pay a dividend? LOL

[sadsack]

CEF recently declared it's dividend for the year - $0.01, so dividends are effectively nonexistant.

From http://www.irs.gov/instructions/i8621/ch01.html


Who Must File




Generally, a U.S. person that is a direct or indirect shareholder of a PFIC must file Form 8621 for each tax year in which that U.S. person:

Recognizes gain on a direct or indirect disposition of PFIC stock,
Receives certain direct or indirect distributions from a PFIC, or
Is making an election reportable in Part I of the form.

Looks like you have to file Form 8621 every year if you're holding CEF in a taxable account :mad::


Additional Information Required




A shareholder of a PFIC must attach certain information to Form 8621. This information includes:

The number of shares in each class of stock owned by the shareholder at the beginning of its tax year;
Any changes in the number of shares in each class of stock during its tax year and the dates of such changes; and
The number of shares in each class of stock at the end of its tax year.



As zoog pointed out, most of this info had been discussed in the referenced thread, although it's a lot to wade through.

[Jim Nickerson]

Ah - ha. Premium posted daily on CEF website. Thanks.

Now, this Form 8621 - that's only for when you wish to declare dividends, and get some tax break on foreign tax withholding, right?

If you don't do that, you just pay the tax on it like a regular dividend, yes?

BTW - How come they pay a dividend? LOL

It pays a piddling dividend because of interest earned on whatever cash is held.

Form 8621 is a bad goddammed joke, the IRS instructions said something like 34 hours of learning to understand it and 5-6 hours to fill it out--those are probably exaggerated but believe me the numbers are ridiculous. I checked whatever boxes seemed to be applicable, included the form CEF and GTU put out to US taxpayers at the end of each year and sent a note for IRS to figure it out and bill me if I owed any taxes.

[qwerty]

Thanks to all for pointing this out.

So, one can buy and sell CEF in a brokerage account just like a US Stock and be blithely unaware of all this stuff.

I have had some CEF sitting in a brokerage account for a while and didn't know about this. Haven't sold any of it yet though, so that's a blessing.

So this year, i 'fess up with the form and hope they don't fine me $10,000 for failing to file before?!?

Or is the filing only necessary if you wish to avoid paying onerous taxes?

[Jim Nickerson]

Thanks to all for pointing this out.

So, one can buy and sell CEF in a brokerage account just like a US Stock and be blithely unaware of all this stuff.

I have had some CEF sitting in a brokerage account for a while and didn't know about this. Haven't sold any of it yet though, so that's a blessing.

So this year, i 'fess up with the form and hope they don't fine me $10,000 for failing to file before?!?

Or is the filing only necessary if you wish to avoid paying onerous taxes?

I don't know the answer to your last question, but whatever it is, you can file an amended return I think for up to three years after a tax year closes. I did that to cover the first year I owned CEF and GTU when I had failed to submit the form. I think it was olivegreen that brought this issue to my attention, but perhaps it mary somebody.

[merry]

...but perhaps it mary somebody.

Perhaps it was merry:)

[Jim Nickerson]

Perhaps it was merry:)

Sorry, if it was you, was it you? Mary was a pretty good guess given my memory. You got anything to add to enlighten us?

[Captain3D]

This 3rd party website calculates a current (20 mins delayed I think) premium.

http://www.silveranalysis.com/cef-premium/

otherwise the official sites list the premium daily for CEF and GTU

http://www.centralfund.com/Nav%20Form.htm

http://www.gold-trust.com/asset_value.htm

I actually saw 26% premium yesterday. Below 5% is uncommon these days. You can take advantage of this if you feel like it by selling CEF as the premium gets too high and switch into GLD/SLV. It is a very common cycle for new shares to be issued when the premium goes up. The next day it drops like this and you switch back in from GLD/SLV to CEF only now you have more shares for the same money.

I managed to increase my shares by 8.5% this time and have managed 7% one other time. I do this in a tax deferred account with $3 transaction fees.

phil

[Jim Nickerson]

This 3rd party website calculates a current (20 mins delayed I think) premium.

http://www.silveranalysis.com/cef-premium/

otherwise the official sites list the premium daily for CEF and GTU

http://www.centralfund.com/Nav%20Form.htm

http://www.gold-trust.com/asset_value.htm

I actually saw 26% premium yesterday. Below 5% is uncommon these days. You can take advantage of this if you feel like it by selling CEF as the premium gets too high and switch into GLD/SLV. It is a very common cycle for new shares to be issued when the premium goes up. The next day it drops like this and you switch back in from GLD/SLV to CEF only now you have more shares for the same money.

I managed to increase my shares by 8.5% this time and have managed 7% one other time. I do this in a tax deferred account with $3 transaction fees.

phil

You are exactly right and very astute to have made these moves. I have been kicking my ass for not paying attention. Did you cross some news that alerted you to the issuance of new shares, or have you just been following the premium and decide to pull the trigger on sellling when it reached a certain threshold?

It seems to me this happened twice now as you mentioned and the previous time wasn't that long ago. Do you know when the first event occurred?

Are you using the 3rd party quote site above to follow the premium while the market is open? How much does it tend to be off from the premium quoted on the CEF site?

[raja]

This 3rd party website calculates a current (20 mins delayed I think) premium.

http://www.silveranalysis.com/cef-premium/

otherwise the official sites list the premium daily for CEF and GTU

http://www.centralfund.com/Nav%20Form.htm

http://www.gold-trust.com/asset_value.htm


The premium posted on the CEF and GTU pages is always from the previous day, so it seems useless to me.

I called them to find out how they calculate. It's not difficult. (Except my calculator was maxing out so I had to use the computer to do the calculations):

Use the data from their site to fill in with CEF current info, e.g., number of shares):

a = Amount of gold bullion in CEF x US$ market price (they use London) = US$ Value

b= Amount of silver bullion in CEF x US$ market price (they use London) = US$ Value

c = Cash & Other

a + b + c divided by Total # of Shares = NAV

(Current market price of CEF minus NAV) divided by NAV = Premium percentage

GTU is calculated the same way, except that instead of the silver bullion component, substitute the "Gold Certificates" amount shown on their website . . . .

[Captain3D]

You are exactly right and very astute to have made these moves. I have been kicking my ass for not paying attention. Did you cross some news that alerted you to the issuance of new shares, or have you just been following the premium and decide to pull the trigger on sellling when it reached a certain threshold?

It seems to me this happened twice now as you mentioned and the previous time wasn't that long ago. Do you know when the first event occurred?

Are you using the 3rd party quote site above to follow the premium while the market is open? How much does it tend to be off from the premium quoted on the CEF site?

Hi Jim

I had no idea about the new shares other than 'they always do that'. Really I had not been following that closely but when I saw CEF going up faster than SLV GLD I checked the premium. I was shocked to see it at 18% and sold. Then it went up to 26%.

Anything over a 10% premium could work but over 15% is when I take it seriously. Yes I just use the 3rd party website, a yahoo comparison chart between CEF, SLV, GLD, GTU and a simple spread sheet where I plug in the numbers and it tells me how much CEF, SLV, GLD, GTU I could buy compared to what I currently own or what I owned previously on the last shuffle.

The CEF premium/new shares cycle happens quite often 2 or 3 times a year. Have a look at the yahoo news headlines for CEF. I see 3 for 2008...


Today, Fri, Sep 26, 2008
• Central Fund Closes U.S.$128,520,000 Class A Share Issue

Jul 22, 2008
• Central Fund Closes U.S.$150,052,500 Class A Share Issue

Wed, Mar 5, 2008
• Central Fund Closes Approximately US$57 Million Share Issue


cheers...phil

[Captain3D]

http://www.silveranalysis.com/cef-premium/

I notice CEF Premium has jumped up again to around 17.5% today. So CEF has zoomed up above GLD and SLV which is the type of thing that triggers the new share iissue. Last time it got to 26% before the made the offering. The next day it was down 12%

So keep watching if you feel like making a temporary jump from CEF to SLV/GLD etc.

phil

[qwerty]

of the premium?

I was thinking that the large premium values were due to the demand for physical bullion.

Coins are in short supply and standard bars are going for 10% above spot.

But if the premium has been going above 20% for a number of years, then ....

[merry]

Maybe I'm being paranoid here, but every time the premium gets to 20% or more, CEF issues more shares, orders more gold and silver, and the share price tanks. With the shortages that refiners and dealers are seeing, I'm worried that CEF may never get the metal they ordered if there is some sort of default.

Have they even received the metal yet from their last offering?

[sadsack]

Maybe I'm being paranoid here, but every time the premium gets to 20% or more, CEF issues more shares, orders more gold and silver, and the share price tanks. With the shortages that refiners and dealers are seeing, I'm worried that CEF may never get the metal they ordered if there is some sort of default.

Have they even received the metal yet from their last offering?

Interesting point. Digging around their website . . .

From the third quarter report (my emphasis):


The stated investment policy of the Board of Directors requires Central Fund to maintain a minimum of 90% of its net assets in gold and silver bullion of which at least 85% must be in physical form. On July 31, 2008, 97.6% of Central Fund's net assets were invested in gold and silver bullion. Of this bullion, 99.3% was in physical form and 0.7% was in certificate form.

Central Fund's physical gold and silver bullion holdings may not be loaned, subjected to options or otherwise encumbered in any way.


Thus the current policy allows them to have as little as 76.5% of NAV in physical bullion - this assumes the minimum of 90% PM, with up to (0.15)(0.90) = 13.5% of NAV in paper PM, and the remaining 10% in cash.

I assume that a severe shortage in bullion would force CEF to load up on cash and certs up to the above limit until they could locate and take delivery of physical bullion. As of 7/31/08, they had plenty of cushion. I wonder what the current cash and cert %'s are.

There's also the question of where the money comes from to purchase bullion.

From the latest press release:



TORONTO, Ontario (September 26, 2008)
- Central Fund of Canada Limited (“Central Fund”) of Calgary, Alberta is pleased to announce that it has completed the sale of 11,900,000 Class A Shares of Central Fund at a price of U.S.$10.80 to CIBC World Markets Inc. (the “Underwriter”), raising total gross proceeds of U.S.$128,520,000.



The money for bullion purchases is either provided by underwriters or private placements with PM dealers. Conceivably, if no one is willing to underwrite new issues of shares, the premium to NAV could grow to monstrous proportions. Then again, if this were to transpire, things would have to be dire enough (indefinite bank holiday, closure of exchanges, etc.) indeed . . .

[Captain3D]

On the yahoo message board it was pointed out that there is a minimum of 90 days before CEF could issue more shares after the last offering. So unless they change the rules we should not see another offering until Christmas.

phil

[merry]

On the yahoo message board it was pointed out that there is a minimum of 90 days before CEF could issue more shares after the last offering. So unless they change the rules we should not see another offering until Christmas.

phil

Thank goodness they can't do any more share offerings for a while. I just checked and the premium is over 25%!:D

Edit: Never mind--there seems to be a big difference between the NAV posted on the CEF website and the one calculated at : http://www.silveranalysis.com/cef-premium/

oh well.

[Captain3D]

I am looking at ...

http://www.centralfund.com/Nav%20Form.htm

It says the fund owns 970665 oz gold = $874,084,153
my calculator tells me that is $900/oz

goldmoney.com tells me 1oz = $847

http://www.silveranalysis.com/cef-premium/

tells me $832/oz. This is more accurate/up to date. So I am going with silveranalysis which is showing a 24.4% premium.

phil

[Captain3D]

Ah. from the yahoo message board...

The premium on the CEF site uses the London close not the last NY spot prices...hence the difference between the premium calculations. The market fell after the London close as you will recall on Friday.

[zoog]

FYI, I note that according to the funds websites, today (Oct 22) CEF premium in US$ is 5.3%, and GTU premium in US$ is 2%. That seems to be in the low range for these funds.

As Captain3D said, they use the London PM fix in their calculations. If I use the NY close of 769.9 I get a discount on GTU of 1.32% (as in, the percent to NAV is -1.32%). But if I use the most current value reported by kitco (722.10 as I type), I get a premium of 5.04%.

[Captain3D]

Yes I have rarely seen lower premiums in the last 2 years.

phil