Central Fund Of Canada – An different Investment means For Precious Metals

Gold has been considered for centuries the “ultimate store of value.” In a world where governments in developed countries in addition as their central bankers have become increasingly adept at guiding their economies by sometimes already the most turbulent of economic and financial squalls, gold’s role as the “ultimate hedge” against financial calamity has become increasingly something of a historic curiosity instead of something that affects the decisions of many of today’s investors. Exceptions are those die-hard gold bugs including some who nevertheless hanker for a return to some kind of international gold standard under which all currencies are pegged to or backed by gold.

In the last few years, however, it is true that gold has had something of a resurgence. This was partly because of increasing need for gold jewelry in developing countries such as India and latterly China, but partly also because of geopolitical instability that has generated uncertainties of a more complicate and fluid character than those that ruled during the cold war years with their geopolitical stalemate between the two superpowers based on the terrifying, however ironically stabilizing, fear of mutually assured destruction. There is also some evidence that the recent formation and purchases of physical gold by gold-connected exchange traded funds (ETFs – see below), have also helped stimulus need for gold.

Direct investments in gold may be made by buy of bullion, coins, jewelry, and other physical forms of the precious metal, but for all but smaller amounts this brings with it the inconvenience and risks of storage and security. For the investor or trader, stocks of gold mining companies provide an excellent way to take a speculative or hedged position on future movements in the gold price. Stocks such Newmont Mining (NEM), Barrick Gold (ABX), Agnico-Eagle Mines (AEM), or Goldcorp (GG) are quoted on the New York Stock Exchange. (The last three of these are Canadian-based companies, however).

While gold mining stocks represent shares in corporations and consequently their individual price movements mirror news that is specific to the individual company, as a group their proportion prices generally follow the gold price closely. Gold mining companies’ production costs are fixed, so any increase in the gold price flows by to the bottom line, and profits are equally affected adversely by any fall in the gold price. A rising gold price is a harbinger of inflationary pressures and so both gold and gold mining company stocks tend to rise when stocks overall are under pressure and fall when the stock market is generally up on the day.

A purer form of gold (and indeed precious metals) investment/trading play and one that is not well known to many U.S.-based investors is Central Fund of Canada, quoted on the Toronto Stock Exchange and with the symbol CEF on the American Stock Exchange. Calgary, Alberta based Central Fund of Canada is itself not engaged in any kind of mining operations. It is a closed-end investment management company set up in 1961 to keep up gold and silver bullion passively on a obtain basis. at the minimum 90% of CEF’s assets are maintained in gold and silver. An investment in Central Fund of Canada provides proportion ownership in this gold and silver bullion, the value of which, together with some cash holdings and other assets, was at August 31, 2007 just under $950 Million (U.S. Dollars). As at that date the divided in precious metals holdings was 52% of net assets in gold and 46% of net assets in silver.

It should be noted that silver has slightly greater volatility than gold, largely owing to the fact that it has fewer commercial and industrial applications, in addition as not having the same position as an “ultimate store of value.” For a trading position consequently, the silver component serves to “juice” the position. For an investor, however, Central Fund of Canada can nevertheless be targeted as a way to take a speculative position in gold specifically in addition as in precious metals more generally. This is because over time the correlation between the gold and the silver price has a inclination to keep to a settled pattern. Recently this has been around 60:1, with one ounce of gold typically valued around the same as approximately sixty ounces of silver.

Recent developments with the introduction of gold exchange trade funds (ETFs) provide another functional medium for investors and traders to speculate on or hedge against the gold price. These offer many of the same basic advantages that Central Fund of Canada offers in terms of convenience and easy availability. The meaningful difference between the Central Fund form and ETFs is that as open-ended vehicles ETFs will tend to trade close to their inner net asset value.

Central Fund of Canada in shared with other close-end vehicles will trade at a discount or premium to its net asset value that at times can be quite meaningful. (It currently trades at a premium). What the authors particularly like about CEF is its track record – 46 years in existence. We believe that thin sector ETFs nevertheless have too short a track record for all of their advantages and disadvantages as trading and investing vehicles to have fully emerged and we do not as however have the same comfort level with ETFs that CEF provides us. At the very least, as a kind of older and more mature cousin of the hot gold sector ETFs of today, we would suggest that investors/traders in the latter may have an interest in looking more closely at the not so very well known Central Fund of Canada.

complete disclosure: The authors trade in and out of stocks on a very short-term basis using their own “Contrarian Ripple Trading” technique. Of the stocks mentioned here, they have recently traded CEF, ABX and NEM.

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