Gyroscopic Investing

Me, along with quite few on this board, bought GTU when its discount widened into the 5-10 percent area.  Now the discount is narrowed to 2%, I've been thinking of switching some of my gold investment over to the Central Fund of Canada. 

The Central Fund of Canada is a closed end precious metals fund that hold 60% gold and 40% silver.  The fund has been around since 1961 so it has a pretty long track record.  Management expenses are quite reasonable 0.31% per year.  As a closed end fund, it qualifies for 15% long term cap gains tax rather than the 28% rate for collectables. 

There are 2 compelling reasons why CEF might be a strong buy right now. 
-  Over the past 20 or so (as far back as I can see) the fund has drifted from a premium to a discount and back again repeatedly.  Currently it is trading at an 12% discount which at the far range of historical discounts for the fund.
- The gold/silver ratio is now at 78 which is historically very high.

If you believe in “regression to the mean” investing as I generally do, the gold/silver ratio should revert to a somewhat more “normal” level of say 60-65 at some point in the future.  If that happens, it would mean silver has appreciated 20% more than the gold price.  Couple that along with discount narrowing on CEF would result in CEF far outperforming any gold ETF performance. 

I'm not suggesting one allocate all of their gold holdings to CEF – it hold too much silver.  However, I don't think it's unreasonable to move up to 50% of the PP's precious metal holdings to CEF.  Even if one were to move 50% to CEF, their total silver holdings would constitute 5% of their total portfolio.  This is the same percentage devoted to silver at the PRPFX and PERM funds so this isn't too outlandish. 

Thoughts?

CEF trading at 11% discount
http://www.cefconnect.com/Screener/FundScreener.aspx

Historical CEF premium/discount
http://www.cefconnect.com/Details/Summa ... &view=fund

Historical gold/silver ration
http://www.macrotrends.net/1441/gold-to ... ical-chart

FarmerD wrote:
Thoughts?

I think it's a reasonable thing to do, as long you're comfortable with the tracking error you'll get as compared to a PP holding only gold, and especially if it's with only a fraction of your gold allocation.

I am thinking about doing it myself.  I trust CEF more than I do GLD, SGOL, IAU, PHYS etc.  They hold almost all of the physical precious metals associated with the fund in vaults and they audit them quarterly, I think.  No futures or anything. 

I don't love having the silver mixed in, but I like feel like it might be worth it to me.

Isn't it just the next takeover target?

dragoncar wrote: Isn't it just the next takeover target?

Let's hope so.  If Sprott wants to make a move to buy this and drive the discount to zero, great for me. 

Agree. Sold my GTU due to all of the drama recently, realized capital losses, captured a few % in a decreasing discount driven by Sprott, and got CEF at nice discount. Although not pure gold, I trust more than the ETFs, and I like that I can sell at capital gains rate rather than collectables if/when metals become the gem of my portfolio again.

dragoncar wrote: Isn't it just the next takeover target?

If they don't wake up and convert to an ETF, yes.
But either way, the discount should be reduced or disappear completely.
(Note: I have a fair amount of CEF in my weird portfolio.)