(Kitco News) - Gold prices may be beaten down, but some investors are looking at closed-end funds as a way to buy the metal at a greater bargain.
Closed-end funds operate a little differently from mutual funds and exchange-traded funds. Mutual funds and ETFs are considered “open-end funds” as they can create additional shares. Their price also closely tracks the net asset value of whatever is in the fund. Closed-end funds have a limited number of shares available. Once the fund goes public, it typically does not issue any more shares. Price of those shares can fluctuate up or down as a discount or a premium to the price of the underlying asset.
Currently, two of the major gold closed-end funds, Central Fund of Canada (TSX: CEF.A; NYSE: CEF) and Central Gold Trust (TSX: GTU.UN; NYSE: GTU), are trading at a discount to gold prices, and some fund managers said long-term gold holders may want to look further at these funds.
Tim Landolt, strategies manager at iSectors, said his firm has recently sold their gold ETF holdings and purchased the two closed-end funds to capture that discount. Landolt said gold plays a strategic role in their portfolios, meaning they’re longer-term holders of the metal.
“We’re still holding gold; it’s just it’s in a different form. It’s allocated and vaulted in Canada, (so) we view as a very similar investment,” he said.
The Central Fund of Canada has a split of 57.4% in gold, 41.7% in silver and 0.9% in cash and other net assets, while the Central Gold Trust is all gold. The metals are stored at a Canadian bank on an unencumbered, allocated and segregated basis, according to the Central Fund of Canada’s website. The Central Fund of Canada has $3.6 billion in its portfolio, with 1.7 million ounces of gold and 76.69 ounces of silver, while the Central Gold Trust has $873.9 million in its portfolio, or 704,652 ounces.
Maury Fertig, chief investment officer of Relative Value Partners, said these funds are good alternatives for people who want to own physical metal, but don’t want the expense of warehousing. Plus the expense ratios of 0.32% and management fee of 0.18% are also low, which saves on fees, he added. While the fund owns the metal, shareholders do not receive any metal in transactions, he said.
Landolt noted for the most part, since 2008 and up until 2013, the funds were trading at a premium to its net asset value. But when gold prices sold off sharply in 2013 and gold investors turning to U.S. equities, the share value of the closed-end funds started trading at a discount. He noted recently the Central Gold Trust traded with as much as a 7% discount to the price of gold. As of Wednesday, the Central Fund of Canada was trading at a 3.8% discount, and the Central Gold Trust at a 4% discount.
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Historically, Fertig said, the funds have held at least very close to their net asset value, so he also sees some value in buying them now for someone who is a long-term holder.
As long as sentiment in gold is bearish, Landolt said he expects these funds to retain this discount, but that’s not likely to last.
“We would anticipate – if gold rebounds and we expect it will someday – that these will revert back to a premium…. When gold has a greater demand, it will revert back to premium,” Landolt said.
That means that investors who bought the fund at a discount would see a price appreciation if sentiment toward gold changes, along with a rise in the net asset value. Fertig cautioned that since the funds are trading at a discount because of negative sentiment, the risk is that the discount widens further.
Before U.S. investors buy either of these funds, however, talk with a tax accountant because these are considered passive foreign investment corporations since they are based in Canada, Landolt said. What that means is the owner can qualify for the standard capital gains tax, which is much lower than the collectibles tax of up to 28%, which is what investors pay when trading the physically backed precious metals ETFs. But dealing with the extra tax paperwork can require the help of a tax accountant.
“It does create a little extra tax work. If tax simplification is a high priority, then do it a qualified account, such as an IRA (individual retirement account) or a 401(k), rather than in your taxable account,” he said.
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By Debbie Carlson dcarlson@kitco.com
