Central Fund of Canada Offers Exposure To Gold And Silver For Those Who Do Not Mind The Mix.
Our scoop last week on the new securitised gold instrument to be announced by the Workld Gold Council next month brought a very swift response from one J.C.Stefan Spicer. “Had we not heard of the Central Fund of Canada Ltd which was established back in 1961 and is a gold and silver backed equity?” The answer was no, so Minews was invited to visit the said company’s website in an effort to alleviate his ignorance.
The Articles of Incorporation of the Central Fund stipulate that a minimum of 75 per cent of the assets have to be invested in unencumbered and insured gold and silver bullion at all times. This was updated back in the 80s when the board of directors at the time mandated that a minimum of 90 per cent backing must be maintained at all times. Since then the management’s position has simply been that it will maintain the maximum backing for the shares at all times and the assets of the company are 98 per cent invested in gold and silver bullion. The balance is held in cash and mining shares.
The pity is that no actual split in terms of ounces between gold and silver as silver has failed to achieve the sustained performance of gold. The balance sheet, however, for the year to end October 2002 shows that net assets were dominated by gold bullion at a market average cost of US$89.7 million and silver bullion at a market average cost of US$89.04 million. These two figures compare with US$55.75 million in 2001 for gold and US$62.75 million for silver which confirms that gold performed slightly better. However the disparity between the prices per ounce of the two metals, which is of the order of 70:1 in favour of gold, brings with it an interesting mathematical problem. Which is easier, for silver to advance 10 per cent from US$4.80 to US$5.28 / ounce or for gold to move from US$350 to US$385/ounce?
There are investors who like gold and there are those who prefer silver. In some cases ‘never the twain shall meet’ but in others it is good to have some diversification from whichever is the preferred investment. The answer might well be to split the fund between gold and silver allowing investors to invest in the proportions they choose. The other pity is that the company has set out to provide a chart of its share price against the spot price of gold and silver running back to the early 80s. The latest gold price, however, is for August 2002 so the moves since then are not shown and it is the last four months that have been particularly interesting for both metals. All that can be gauged from these charts is that the shares of the Central Fund of Canada have tracked the gold pretty faithfully over the past 17 years, but silver got out of sync back in 1998.
The pity is that the loss made by the Central Fund in 2002 was US$1.89 million which seems a lot for a company whose main task is to supervise static investments in gold and silver. Expenses did not rise that much – US$749,472 versus US$573,453, most of which came from higher admin costs – but it made a loss of just under US$1 million from losses on investments. Apparently management decided to focus its portfolio of equity securities on high quality , senior gold and /or silver producers. This meant selling off a number of junior stocks which, presumably, had been held for some time. With benefit of hindsight it might have been wiser to have carried out the switch a year earlier, or else to have hung on as the move by investors through into the junior section now looks imminent.
Central Fund's shares qualify for inclusion in retirement accounts, pension and insurance plans and mutual funds that are otherwise precluded from hold physical bullion directly. The shares are listed on the American Stock Exchange as well as Toronto so investors can obtain direct exposure to gold and silver simply by calling their stockbroker. It will be interesting to see if the World Gold Council’s securitised gold instrument is going to be backed by allocated, segregated and insured gold bullion or by paper gold. The likelihood musts be that it will be backed by physical gold, though James Burton, the new CEO of the Council , is proving a bit elusive at the moment. What is quite clear, however, is that it will not be mixed in with silver
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