Great Ponzi.com

2009-08-29

Product report: CEF (Central Fund of Canada)


Disclaimer / Disclosure

This report does not constitute a recommendation or advice to purchase any investment. The author does not hold any certifications in accounting or finance. The author does not work for Central Fund of Canada or any related companies. The author owns shares of CEF but has not bought or sold any shares since September 2008.

Description of CEF

Central Fund of Canada (CEF on American exchanges and CEF.A on Canadian exchanges) is a stock exchange traded closed-end fund which holds gold and silver bullion for the convenience of shareholders, typically in a 50/50 ratio. The governing articles of the fund require that at least 75% of the non-cash assets be invested in gold and silver bullion. Typically this figure is much higher, a minimum of 90% of assets in bullion.

Because it is a closed-end fund, CEF routinely trades at a premium or discount to NAV (net asset value). The NAV of the fund is published daily (Central Fund's NAV page) but the price on the stock exchange can be wildly different from its NAV. Historically, CEF has traded from as low as 30% below NAV to 30% above NAV.

The consequence, as with any closed-end structure, is that an investor could experience wild gains or losses even while the fund's NAV remains unchanged. This premium/discount to NAV issue is one of the trickiest elements of CEF in practice.

Unlike the other precious metals funds and ETFs, Central Fund of Canada has a very long track record and very simple composition. Central Fund is based in the province of Alberta, and was incorporated in 1961 and listed on Canada's TSX in 1965. In 1983, the Board changed the portfolio to pure gold and silver bullion. For at least the last decade, the fund has simply been composed of gold, silver, and cash. There is no other precious metals or commodity ETF with such a long track record and simple construction. CEF passively holds its portfolio consisting of bullion, a small number of certificates, and cash.

Holding physical gold and silver via CEF

Since CEF shares are an alternative to physically holding bullion, an investor wants to see stable bullion (in ounces) ownership per share. While the market price of the metals will always fluctuate, the amount of bullion represented by an investor's shares should stay constant.

In practice, factors such as management fees, bullion trading inefficiencies, and other losses contribute to a decline in bullion ownership per share. One might call these fees, dilution, and other losses. Central Fund periodically issues more shares, using the proceeds to buy more bullion. While Central Fund calls these share issues non-dilutive, the activity is not perfectly efficient and so minor losses inevitably result. The annual $0.01 dividend paid out by CEF has a metal equivalent value, which makes up for some of those losses a shareholder experiences.

The following table (starting with 1999 data) specifically shows the amount of metal (oz.), not dollar values, a shareholder owns via CEF. The market prices of gold and silver do not factor into these numbers, except when calculating the metal equivalent of the annual dividend.




SHAREHOLDER BULLION OWNERSHIP, PER 100 SHARES


Gold ounces

Silver ounces


Fund NAV

Dividend

Total (adj.)

Fund NAV

Dividend

Total (adj.)

1999 Sep

0.6918


0.6918

34.6110


34.6110

1999 Nov


0.00172



0.0984


2000 Jan

0.6811


0.6828

34.0793


34.1777

2000 Nov


0.00189



0.1064


2001 Nov


0.00181



0.1225


2002 May

0.6718


0.6772

33.6459


33.9733

2002 Nov


0.00157



0.1099


2003 Sep

0.6638


0.6708

33.1790


33.6162

2003 Nov


0.00128



0.0980


2004 Apr

0.6603


0.6686

33.0075


33.5428

2004 Nov

0.6571

0.00115

0.6665

32.8472

0.0667

33.4492

2005 Aug

0.6571


0.6665

32.8472


33.4492

2005 Nov


0.00108



0.0649


2006 Jul

0.6534


0.6639

32.6626


33.3295

2006 Nov


0.00080



0.0391


2007 Jul

0.6467


0.6580

32.3317


33.0377

2007 Nov


0.00061



0.0333


2008 Jan

0.6416


0.6535

32.0762


32.8155

2008 July

0.6388


0.6507

31.9372


32.6765

2008 Sep

0.6366


0.6485

31.8281


32.5674

2008 Nov


0.00069



0.0526


2009 Feb

0.6361


0.6487

31.8006


32.5925

2009 May

0.6342


0.6468

31.7076


32.4995

2009 Aug

0.6338


0.6464

31.6905


32.4824

Net impact on bullion amounts owned by shareholders

Inspecting the gold and silver ounces column, there is definitely a decline over time (as one would expect due to management fees). Averaging the declines seen on both the gold and silver side, here is the big picture:

These numbers are reasonably small, though they are considerably higher than the “expenses as a percentage of... net assets” which Central Fund reports as 0.38%. Effectively the fees, dilution, and other losses amount to 0.6% to 0.8% per year in terms of metal held by CEF shareholders.

(end of report)

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