Thursday, November 6, 2014

Precious Metals NAV Opportunity: Central Fund Of Canada

NAV stands for Net Asset Value. In simple terms it means the premium or discount you pay for the assets that are stored at a fund.

Imagine a fund holds 10 ounces of gold and the gold price is $1,000. The fund has $10,000 of assets held within their vaults. Let's say this fund allows 10 investors to purchase shares within this fund. With $10,000 in the fund each share would be worth $1,000. At $1,000 the NAV would be 0.0%.

When the Sprott Physical Silver Fund (PSLV) first launched in November of 2010 the premium was close to 0% and I was fortunate to have moved money into the PSLV fund around the time of the launch. Over the next 13 months the premium on the PSLV moved up to 32%. I sold my holdings at the time (January 2012) and moved them into the SLV (silver ETF). I was able to time the top almost exactly (complete luck) and the NAV on the PSLV collapsed downward soon after to about 6%. I then transferred my SLV funds back into the PSLV where they have been since.

I discussed my concern around the hefty 32% PSLV premium at the time (see Purchasing Precious Metals: NAV Considerations)  saying that I only liked to use the SLV as a short term trading tool and not a long term investment vehicle. I prefer to know that a fund is backed 100% by physical metal that can be redeemed upon demand. At that time I recommended investors take a look at the Central Fund of Canda (symbol CEF), which held only a 1% premium in January 2012. This fund holds 60% of its assets in gold and 40% in silver, and it rose from the 1% premium to over 8% in the months ahead (again, the timing was lucky).

During the metals destruction over the past few years this premium has collapsed downward and it now sits at negative 10%. Going back to our example above in the $1,000 gold fund, this means if 10 investors were purchasing shares within the fund they would pay $900. Essentially they would own a claim on $1,000 gold for $900 dollars.

For investors new to the market that are looking for gold and silver exposure for their portfolio, or those that are wishing to add to positions during the current price massacre, I believe this is the best option to do so. Please understand that if the precious metals prices continue to free fall and the NAV on the CEF continues to move further into the negative territory you will be hit with a double paper loss in the short term.

However, if precious metals prices ever bottom and rise again in our lifetime and the NAV were to move back into the positive (or even less negative), you will experience turbocharged gains on the upside.

I am not a financial advisor, please speak with one before making any investment decisions. 

2 comments:

  1. Would your same logic/reasoning apply to uranium, about which you also have written? URA has taken a beating lately but is sharply higher today.

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    Replies
    1. Yes, I love uranium at these prices.

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