Why is GTU down almost 4%?

[ViC78]

This has me perplexed.

Here is the news.

TORONTO, ONTARIO, Jun 16, 2010 (MARKETWIRE via COMTEX) -- Central GoldTrust of Ancaster, Ontario announced today that it has entered into an underwriting agreement with CIBC World Markets Inc., as lead underwriter, and Credit Suisse Securities (Canada), Inc. (the "Underwriters"), under which the Underwriters have agreed to buy and sell to the public in Canada (except Quebec) and in the United States under the multijurisdictional disclosure system, 5,730,000 Units of Central GoldTrust. The Underwriters have been granted the right to increase the size of the offering (the "Right") by up to an additional 1,000,000 Units, exercisable in whole or in part, at any point prior to 4:00 p.m. (EST) on June 16, 2010. The offering will be made under an initial prospectus supplement to Central GoldTrust's US$800,000,000 base shelf prospectus dated June 8, 2009.
The purchase price of U.S.$48.90 per Unit is expected to result in gross proceeds of approximately U.S.$ 280 million, prior to the exercise of the Right. Substantially all the net proceeds of the offering have been committed to purchase gold bullion for settlement at closing, in keeping with the asset allocation provisions outlined in Central GoldTrust's Declaration of Trust and the related policies established by its Board of Trustees. Any additional capital raised by the offering is expected to assist in reducing the annual expense ratio in favour of all Unitholders of Central GoldTrust.

I think that this issue is non-dilutive to the current unit holders. Does anybody know otherwise?

[ASH]

Re: Why is GTU down almost 4%?

I think that this issue is non-dilutive to the current unit holders. Does anybody know otherwise?

I'm not 100% sure I understand why CEF and GTU share price drops during these "non-dilutive" share issues, but I believe it is because of the premium over spot price at which the shares trade. In other words, the ratio of shares outstanding to physical gold (or gold and silver, in the case of CEF) held by the trust remains the same, but the premium over spot drops when the trust buys the new bullion and issues new shares, so your share price drops. So, my guess is that the share issues are non-dilutive in the sense that the shares represent ownership in the same amount of bullion before and after the issue, but not in the sense of share price.

[jiimbergin]

Re: Why is GTU down almost 4%?

from Jesse

http://jessescrossroadscafe.blogspot...ts-entire.html

I am guessing that those who want to buy GTU's new offering are pushing down the price, but who knows?
15 June 2010

Central Gold Trust Opens Its Entire $800 Million Base Shelf Prospectus in a Non-Dilutive Offering




Stefan Spicer is opening up his Central Gold Trust (GTU) for expansion in a very classy way, making it non-dilutive of NAV so as to not penalize the existing unit holders.

Well done indeed. An excellent response to surging market demand. The Spicers once again show the way to respond to their customers.

It will be interesting to see how quickly this offering sells. Since the Central Gold Trust holds its bullion in a strict allocation it represents a potentially large physical offtake in a tight bullion market as the move to hard assets continues.

And as an aside, it is so nice to be able to trade Canadian securities on the American exchanges. Anyone who trades the Canadian junior miners on the 'pink sheets' is all too familiar with the spread games and bid dodging the market makers are playing these days.

For Immediate Release toCanada News Wire and U.S. Disclosure Circuit
TSX SYMBOLS: GTU.UN (Cdn. $) and GTU.U (U.S. $)
NYSE AMEX EQUITIES SYMBOL: GTU (U.S. $)

CENTRAL GOLDTRUST ANNOUNCES PROPOSED OFFERING

TORONTO, Ontario (June 15, 2010) - Central GoldTrust of Ancaster, Ontario announced today that it plans to offer Units of Central GoldTrust to the public in Canada (except Québec) and in the United States under its existing U.S.$800,000,000 base shelf prospectus dated June 8, 2009 and filed with the securities commissions in each of the provinces and territories of Canada, except Québec, and under the multijurisdictional disclosuresystem in the United States pursuant to a proposed underwritten offering by CIBC.

Central GoldTrust will only proceed with the offering if it is non-dilutive to the net asset value of the Units owned by the existing Unitholders of Central GoldTrust.

The entire original amount of U.S.$800,000,000 provided for in the base shelf prospectus is available for this offering.

Substantially all of the net proceeds of the offering will be used for gold bullion purchases, in keeping with the asset allocation provisions outlined in Central GoldTrust’s Declaration of Trust and the related policies established by its Board of Trustees. Any additional capital raised by the offering is expected to assist in reducing the annual expense ratio in favour of all Unit holders of Central GoldTrust...
Read this entire news release here.

[globaleconomicollaps]

Re: Why is GTU down almost 4%?

exactly correct. these offerings are one of the surest ways to make money in gold stocks. They happen infrequently enough that they tend to pull in a good deal of "dumb money" who have never seen them before.

[jmaxey]

Re: Why is GTU down almost 4%?

GTU is a closed end fund and thus trades at either a premium or discount. It has been trading at a 10% premium because it has actual physical bullion which is audited. This issue removed the premium and it is now trading at about spot prices. Sprott went through the same same thing a couple of weeks ago. I took the opportunity to rotate half of my holdings out of GTU into Sprott and now watch the premiums on both funds. Should one get out of line then I will take needed actions accordingly. The only holdings I have related to GLD are long term puts. IMO it is due to blow, simply a matter of timing.

[CanuckinTX]

Re: Why is GTU down almost 4%?

This happens frequently with GTU every time they announce another offering. The premium always gets bid back up though so if anything this is a decent opportunity to load up a bit if you find yourself short of your ideal allocation.

[ViC78]

Re: Why is GTU down almost 4%?

Sorry if this is a dumb question. What exactly determines the premium on GTU? I have seen the premium waver between 2% and 12%.
I thought that the premium was due to the fact that the capital gains on GTU are not taxed at the collectible rate as GTU is a closed end mutual fund as opposed to GLD.
Also, why would such an offering lower the premium since it is not diluting the current stock?

Edit: Read Ash's answer above and he raised the about the premium over spot dropping when they buy more bullion with the newly acquired funds. I do not quite understand this. I guess part of the premium over spot goes towards the cost of physical storage. So more bullion, same storage space => less cost of storage per unit => lower premium? (Is this what you are trying to say, ASH?)

Edit 2:
Just found this as well -

For US citizens, GTU is classified as a Passive Foreign Investment Company, meaning you have to file a Form 8621 with your taxes each year. Unlike bullion and bullion ETFs like GLD which are subject to 28% capital gains tax, GTU is (currently) subject to only the 15% capital gains tax.

http://crawlingroad.com/forum/index.php?topic=12.0

[jmaxey]

Re: Why is GTU down almost 4%?

The premium or discount is dictated by the market its view of the value of the fund. In both the case of GTU as well as certain other closed end funds where the sponsors can't just issue units of trust out of thin air, it has decided that a premium is worth this feature. When I queried GTU some time back this is the response that I received:

Thank you for your interest in Central GoldTrust.

The Declaration of Trust requires that at least 90% of the assets of Central GoldTrust (“GoldTrust”) be held in physical gold bullion at all times. This cannot be changed without the approval of the Unitholders.

GoldTrust’s physical gold holdings may not be loaned, pledged, subjected to options or otherwise encumbered in any way.

Gold bullion is stored on an allocated and segregated basis in the underground treasury vaults of the Canadian Imperial Bank of Commerce (the “Bank”), one of the largest banks in Canada.

The Bank may not release any of GoldTrust’s physical bullion holdings without receipt of an authorizing resolution of the Board of Trustees of GoldTrust.

Bullion holdings and Bank vault security are inspected annually and spot inspected periodically by Trustees and/or Officers of GoldTrust. On each occasion, inspections are required to be performed in the presence of both GoldTrust’s external auditors and Bank personnel.

I have attached our annual report for your review. Details of gold bullion holdings are found under note 3 (page 7) to the financial statements and the Auditors report on page 12, 13.

Please let me know if you have any further questions.

Sincerely,

Krystyna Bylinowski
Investor Service

[ASH]

Re: Why is GTU down almost 4%?

Edit: Read Ash's answer above and he raised the about the premium over spot dropping when they buy more bullion with the newly acquired funds. I do not quite understand this. I guess part of the premium over spot goes towards the cost of physical storage. So more bullion, same storage space => less cost of storage per unit => lower premium? (Is this what you are trying to say, ASH?)

Hi ViC. The premium over spot reflects market demand for shares of GTU, and that demand is influenced by the factors you and others mention. There are tax, storage, and convenience advantges relative to holding physical directly, and tax and what I'd call "confidence" advantages relative to some other forms of paper gold like GLD. However, the premium isn't directly determined by the operational costs of the fund (or at least this is a very minor issue). The premium of GTU share price over net asset value (essentially gold spot price) drops when GTU buys more gold and issues more shares because the increase in the number of shares "dilutes" the premium, although it doesn't dilute the NAV. Plus, knowing that share issuance will dilute the premium reduces the premium market participants are willing to pay to hold those shares, because that component of share price will be a guaranteed (short term) loss.

To be as concrete as possible:

share price = (NAV + premium) / shares outstanding

If you increase the gold holdings of the fund proportionally to the shares outstanding, then NAV gets bigger in proportion to shares outstanding, but premium does not:

new share price = [(old NAV + extra gold) + premium] / (old shares outstanding + new shares)
where (old NAV + extra gold) / (old shares outstanding + new shares) = old NAV / old shares outstanding

Knowing that this will happen, and that the component of GTU share price due to premium will be diluted, some traders therefore choose to sell GTU, and the premium drops further. So, really:

new share price = [(old NAV + extra gold) + new premium] / (old shares outstanding + new shares)

Note that in the above, the premia are treated as fixed quantities rather than percentages, so that they can be grouped with NAV. Also, the premia and NAV are totals, and not "per share".

[ViC78]

Re: Why is GTU down almost 4%?

Hi ViC. The premium over spot reflects market demand for shares of GTU, and that demand is influenced by the factors you and others mention. There are tax, storage, and convenience advantges relative to holding physical directly, and tax and what I'd call "confidence" advantages relative to some other forms of paper gold like GLD. However, the premium isn't directly determined by the operational costs of the fund (or at least this is a very minor issue). The premium of GTU share price over net asset value (essentially gold spot price) drops when GTU buys more gold and issues more shares because the increase in the number of shares "dilutes" the premium, although it doesn't dilute the NAV. Plus, knowing that share issuance will dilute the premium reduces the premium market participants are willing to pay to hold those shares, because that component of share price will be a guaranteed (short term) loss.

To be as concrete as possible:

share price = (NAV + premium) / shares outstanding

If you increase the gold holdings of the fund proportionally to the shares outstanding, then NAV gets bigger in proportion to shares outstanding, but premium does not:

new share price = [(old NAV + extra gold) + premium] / (old shares outstanding + new shares)
where (old NAV + extra gold) / (old shares outstanding + new shares) = old NAV / old shares outstanding

Knowing that this will happen, and that the component of GTU share price due to premium will be diluted, some traders therefore choose to sell GTU, and the premium drops further. So, really:

new share price = [(old NAV + extra gold) + new premium] / (old shares outstanding + new shares)

Note that in the above, the premia are treated as fixed quantities rather than percentages, so that they can be grouped with NAV. Also, the premia and NAV are totals, and not "per share".

Thanks for the explanation, ASH. Appreciate it and makes sense. However, shouldn't the premium be calculated per "actual" share (a share can be translated to X amount of bullion) as the premium is essentially the price you are willing to pay above spot due to the various factors mentioned earlier. Hence, the increase or decrease in the number of shares should not make a difference as long as it is proportional to the amount of bullion increased/decreased. The only external, somewhat nebulous, factor is the "confidence" measure that you mentioned. However, I cannot imagine "confidence" being the deciding factor today.

I am definitely missing something obvious. Apologize for the thick headedness.

[ASH]

Re: Why is GTU down almost 4%?

Thanks for the explanation, ASH. Appreciate it and makes sense. However, shouldn't the premium be calculated per "actual" share (a share can be translated to X amount of bullion) as the premium is essentially the price you are willing to pay above spot due to the various factors mentioned earlier. Hence, the increase or decrease in the number of shares should not make a difference as long as it is proportional to the amount of bullion increased/decreased. The only external, somewhat nebulous, factor is the "confidence" measure that you mentioned. However, I cannot imagine "confidence" being the deciding factor today.

I am definitely missing something obvious. Apologize for the thick headedness.

I don't think you're being thick-headed. I agree that the premium should normally be thought of as a proportion of the share price, rather than a fixed quantity. I also agree that the premium that folks are willing to pay to hold GTU "should" be independent of the total number of shares, so long as gold is added to GTU's holdings in proportion to the shares created. I think this is why the premium recovers in the long run. I expressed the premium as a fixed quantity in my earlier post to try to illustrate that GTU was adding enough gold to avoid diluting the NAV per share, but that nothing was being added which would automatically cause those shares to trade at a premium. But maybe that isn't the simplest way to think about it. How about this: when the new shares are sold by GTU, the proceeds will be used to buy gold. That means people who purchase the new shares when they are issued will have the privilege of buying GTU at essentially zero premium over NAV. Knowing this, current holders of GTU are less likely to want to own GTU at a premium, because they know that pretty soon a whole bunch of shares of GTU are going to be dumped onto the market at essentially zero premium.

[ViC78]

Re: Why is GTU down almost 4%?

How about this: when the new shares are sold by GTU, the proceeds will be used to buy gold. That means people who purchase the new shares when they are issued will have the privilege of buying GTU at essentially zero premium over NAV. Knowing this, current holders of GTU are less likely to want to own GTU at a premium, because they know that pretty soon a whole bunch of shares of GTU are going to be dumped onto the market at essentially zero premium.

Great, I think this makes more sense to me (Finally!!). However, the shares are still being sold at a premium. As of yesterday,

Net asset value per Unit				$45.79		$47.10
Trading Symbols on NYSE and TSX				GTU		GTU.UN
Closing market prices		15-Jun-10		$50.50	NYSE	$51.75	TSX
Premium / - Discount				10.3%		9.9%
Number of units traded on exchanges				64,805		1,850

NAV = $45.79
New Share Price = $48.90 (Premium = 6.79%)
10.3 - 6.79 = 3.4%
Gold declined today = 0.5%
Hence, taking into account the new shares + gold price discount, the decline in GTU price today should have been 3.9%. Actual decline = 4.5%. Close enough. 0.6% can be attributed to the normal fluctuations in premium due to investor appetite.

Thanks! (Hopefully, that made sense).

[ER59]

Re: Why is GTU down almost 4%?

So is this an opportunity to buy GTU at a 4% discount or not?

[ASH]

Re: Why is GTU down almost 4%?

So is this an opportunity to buy GTU at a 4% discount or not?

In my opinion, yes. I can't make any promises about the price of the underlying commodity, but all else being equal, the best time to add to positions in GTU or CEF is when the premium is low, which generally occurs right after an announcement like this. Generally speaking, the premium will recover over time, unless factors affecting the desireability of exposure to gold change.

EDIT: I should probably make my usual disclaimer, since it has been awhile. I believe I am correct, but I am not a trader, nor a particularly experienced investor. The "High Commissioner" label appended to my avatar is an award for showing up -- not necessarily performing!

[ASH]

Re: Why is GTU down almost 4%?

Great, I think this makes more sense to me (Finally!!). However, the shares are still being sold at a premium.

One factor to consider is that GTU announced it would offer the new shares at $48.90, which is larger than the NAV per share on 6/15, but smaller than yesterday's share price. Today (6/16) GTU closed at $48.10, which is actually below the price at which the new shares will be offered. But I bet the issue of new shares at $48.90 has a lot to do with where GTU trades in the near term -- it should define a ceiling until all the new shares are sold.