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XMFSinchiruna (26.52)

A Buying Opportunity for Gold and Silver Bullion...



September 23, 2008 – Comments (10) | RELATED TICKERS: CEF , GTU.DL

Well, Fools... they've done it again. The excellent managers up North at the Central Fund of Canada have announced another well-timed, non-dilutive share offering in order to purchase more bullion for the fund. Every time they do this, they A.) take more gold and silver off the physical market... in a way that's much more permanent than the inferior ETFs, B.) reduce their already-low expense ratio, and C.) remove a significant portion of the premium priced into shares by the market over the fund's net asset value... offering Fools like you a very attractive entry point. All the added premium tacked on to shares in recent days as investors flocked to the everything precious has essentially just been erased by the pricing of the share offering at $10.80. For going on four years now, I have attempted to accumulate CEF shares immediately following the announcement of each non-dilutive share offering, and it has worked out quite well. If I had cash on hand, I would be buying today. For anyone looking for exposure to gold and silver bullion, there really is no equal to CEF. If you hold SLV, GLV, IAU... etc... may I suggest making the switch?

Of course, it goes without saying that my motivation in offering this suggestion is solely with the aim of helping my fellow Fools, and in no way represents any attempt to affect the shares in any way (not that I think I wield that kind of power anyway). I have reviewed the prospectuses of SLV and other new bullion instruments, and recall when SLV removed all mention of the word bullion from the prospectus last year. I sent them an e-mail inquiring as to the reason for the language change, and never received a response. Since that time, I have been quite cautious about the bullion ETFs, and prefer instead to recommend CEF... which has been around for 40 years. I care about my Fool readers, and want people who seek protection from this financial crisis through exposure to precious metals to know what they're getting into. I simply believe CEF is the safest and best proxy for bullion on the market.

I only recently became aware of the existence of GTU: Central Gold Trust. I will report my thoughts on that one here once I have a chance to take a closer look. In the meantime, I certainly didn't hesitate to add it to my CAPS profile.

Disclosure: I am most certainly long CEF, used to be long SLV and IAU... but sold them to buy junior mining shares (prematurely). :)


10 Comments – Post Your Own

#1) On September 23, 2008 at 10:43 AM, devoish (63.65) wrote:

Anomalee makes a strong case about risk associated with ETF's.

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#2) On September 23, 2008 at 10:47 AM, XMFSinchiruna (26.52) wrote:

Agreed. I enjoyed that post too. This is precisely why I prefer CEF.

My latest article about the bounce in gold for anyone who missed it:


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#3) On September 23, 2008 at 11:25 AM, binv271828 (< 20) wrote:

Yep, that was a 10% gift. A ~10% drop in the price based on news of a non-dilutive offering from the best run, best audited physical holding fund. I added to my position this morning too.

Sorry I have been AWOL for awhile. Work is crazy busy :). Thanks again for these blogs, and for pointing out how obviously incorrectly the market interpreted the CEF offering.

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#4) On September 23, 2008 at 12:04 PM, leohaas (30.10) wrote:

Thanks for the tip. I have been looking to get a little exposure to gold, and trust your judgement on this. Just bought at $10.97.

Disclosure (for the not-so alert reader): I was long CEF at the time of writing my comment.

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#5) On September 23, 2008 at 4:12 PM, XMFSinchiruna (26.52) wrote:


Welcome back, man! You were sorely missed around here, but you coudn't have picked a better time to look the other way.  :P

To be precise... it's not that the market interprets the price offering incorrectly. It makes sense for the share price to correct down to the offer price for the new shares until those new shares are sold into the market. The offering price is determined by adding a small premium to the net asset value of the fund's bullion holdings on the day of the announcement. The fact that the market premium above that NAV was so large is an indication of the buying fever that has overtaken the market as investors try to scramble for some safe haven assets (corroborated by GLD's holdings reaching a record level on Friday). For shareholders, the fact that CEF shares generally track between a 3 to 10% premium over the NAV is a great thing. For people looking to dollar-cost average in or make an initial purchase, though, I view these moments when the share offerings are announced as the ideal moment to add shares or start a position.


Great buy, man!!  You did note, I presume, that the fund's holdings are equal parts gold AND silver, right? In my opinion, that makes the capital appreciation potential of the shares that much stronger, as the gold to silver ratio has reached a truly historic high above 67:1!!! This is the highest it's been since 2002.

Also, as i've said before, we will continue to see an increase in volatility among precious metals. While I am convinced the vast majority of that volatility will be to the upside, and I believe the position from which institutions like Goldman Sachs underhandedly manipulated prices through naked short positions, etc., I will not completely rule out the possibility that the Fed/Treasury/ECB/now-defunct investment banks may yet have at least some ammunition in their arsenal with which to continue their assault on gold and silver. In the long run, those efforts will fail as the true extent of fiat monetary devaluation from this bailout plan is exposed and foreign holders of U.S. debt begin to unwind those positions in earnest, those clinging to control over the financial situation will no doubt include gold and silver among their priorities.... alongside their futile efforts to prop up the USD.

That's my rant on bullion for today. :) And it was the longest caveat I've ever written.  :)  Your investment will do phenomenally well for you if you hold it right through this whole mess and sell it before the whole thing is over. I will be here to let Fools know when I think the end of the cycle might be near, but I believe we have years left to go, and my minimal target for such a reversal is about $2,000 gold.


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#6) On September 23, 2008 at 6:30 PM, RainierMan (64.36) wrote:

Chris--although I've followed your blogs only occassionally, the more THIS new investor learns about the economy, the more I see your point on gold. I really appreciate your blogs. I definately want to add gold to my assets, although I can't really go hog wild with it.

If you have any past blogs that you would recommend us new guys go back a read if we are just getting into gold now, that would be useful. I'm thinking CEF would be a good place to start.

Anyway, keep those thought coming, and thanks sharing.

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#7) On September 23, 2008 at 7:53 PM, XMFSinchiruna (26.52) wrote:


For the investor seeking limited exposure, I think CEF is a great starting point. It's no frills exposure to bullion, with none of the learning curve required for ownership of the miners. The mining industry is a complex space, and I would recommend investors tread with some caution at least until they've had a chance to familiarize themselves with the challanges the industry faces so they can identify which might be the best bets.

That being said, I do believe the whole sector is due for an upward correction now that the illegal naked shorting activity is being controlled at least on the U.S. equities. With that in mind, a modest holding in the Market Vectors Gold Miners ETF might be a nice way to start while one sifts through to identify favorite miners for a more targeted purchase later. I would view that merely as a stopgap measure... a place to get started... and ideally I would recommend getting out of that and into individual miners thereafter.

That's the cliff notes version of gold investing that I suggested as a possibility in this article. I still like all three of the others mentioned there as well.

Shares of Yamana appear to have lagged the sector this week during gold's dramatic ascent. There is no identifiable findamental reason for this, suggesting it might have something to do simply with funds unloading positions, etc. That's a great growth story for the long-term that is priced below my cost basis (even though I've owned it for years). I think a newbie coming into gold and silver right now is in a sweet position because of how deep the recent sell-off ran.

On the silver side... I think Silver Wheaton is perhaps the best equity on the planet, and can be conservatively valued at 1.2X the spot price of silver. At $13.50 silver, that valuation would be $16.20, and shares are presently at $10, placing the equity firmly in bargain territory in my opinion. After CEF, SLW is my second biggest holding, and will remain so for quite some time.

Here are a few more of my selected articles:

Good luck. Feel free to e-mail me anytime with questions. (link at bottom of any of those articles)

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#8) On September 23, 2008 at 8:54 PM, RainierMan (64.36) wrote:

Excellent info, as always, Chris. Thanks very much for your comments.

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#9) On September 24, 2008 at 1:14 AM, MGDG (32.91) wrote:

An ETF that actually trys to back all the paper certificates with Physical Metal. Now isn't that a novel idea.

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#10) On September 24, 2008 at 4:18 AM, XMFSinchiruna (26.52) wrote:

For the record, CEF is not an ETF. That's a good thing. :) It's existence predates the invention of ETF instruments by more than 35 years. :) It's an honest to goodness public company that you can own a piece of.

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