How Can Stefan Spicer Help Investors?

A recent piece by Zeal, PM Summer Doldrums 2, demonstrates cyclical tendencies for gold and silver prices to trend flat to down from Memorial Day to Labor Day. Given the runs both metals have had recently, such action would be no surprise and consistent with ongoing bull trends in each metal.

Investors who want exposure to the metals have an edge if they look at the three funds run by Mr. Stefan Spicer. His father founded the venerable Central Fund of Canada, which owns gold and silver in currently about a 60/40 proportion by value. Recently, single-metal funds of similar quality were formed, Gold-Trust and Silver Bullion Trust.

As of the close of business Friday, Central Fund (CEF) traded at about an 8% premium to Net Asset Value (NAV), while the Gold-Trust (GTU) was at a 3% premium and Silver Bullion Trust (SVRZF on the pink sheets or SBT_U in Toronto) was at a 2% premium.

Thus one can synthetically own CEF at a significant savings. Over time, there is no reason why GTU + SVRZF should not trade in line with CEF. Recently, for example, GTU was at a 10% premium to NAV. It sold off when it announced a secondary offering, even though this offering is anti-dilutive to existing shareholders and slightly decreases the expense ratio in the future. GTU is now trading only 3% above is March 2009 peak price, while gold is up over 30% from the same period. GTU is below its early December 2009 price, whereas gold and its trading proxy GLD are up several per cent.

Dr. Achuthan of the ECRI has been giving interviews that there will be no new recession this year and that while it is not calling for one in 2011, his base case is for perhaps 3 recessions over the next decade. He believes that policy-makers are facing price deflation issues and intimated that he believes that more "money-printing"/government spending is on the horizon. In other words, he is putting forth the Japanese experience as what may await.

If this is ECRI's base case, and gold has been rising in price along with rising Federal debt levels, then until and unless that relationship ceases, it is hard to see a reason not to be long significant amounts of gold within a diversified portfolio. The case for silver is more difficult, but silver is 17 times more common than gold and rather than the current gold:silver price ratio of over 60:1, eventually this ratio can easily normalize to anywhere from 20:1 to 55:1.

Thus the case for buying GTU and SVRZF/SBT_U and not selling unless their premiums to NAV reach peak levels appears to be a good one.

Copyright (C) Long Lake LLC 2010

Gold: Comments on Price and Relationship to Stocks

The accompanying chart is an about 22-year chart showing long channels of first, gold outperformace v. stocks, then the opposite, then back to gold. Gold was price-controlled for much of the 20th century; we saw long periods of a 5:1 ratio in the pre-FDR days, and at the depths of the Depression after gold was raised to about $35 per ounce, we say 2 or 3 to 1 as the ratio, rising at the maximum pre-WW II to 5 to 1.

From a sentiment standpoint, the only free sentiment data I can follow daily comes from the premium of Gold-Trust's NAV to the value of its gold holdings. That premium has been about 2.5% the past 2 days, and is about 2.1% as I write this.

Having followed GTU for the past year or so, I can say this is about as low a premium as it has carried.

At gold's peak price in early December, that premium surged to about 9%.

Similarly, the much larger and much better known Central Fund of Canada (CEF) is down to a 3.9% premium over NAV. This fund, which owns both gold and silver, has often traded at a double-digit premium to NAV. CEF and GTU are run by the same organization; www.gold-trust.com; www.centralfund.com.

(In case you are wondering, there are various reasons to value precious metals held in these ETFs over those held by the much larger GLD and SLV ETFs; at least many people believe so, which accounts for their premia.)

I take the above to be encouraging signs that the hot money is leaving or has left the precious metals market.

Structurally, gold but not silver is in a confirmed bull market. Similarly, platinum (PPLT) is in a moderately bullish long-term configuration but has not taken out its high of prior years as gold did late last year. Palladium (PALL) is nowhere long-term; its recent strength vs. gold has been a source of concern as it is the most speculative of the bunch.

Currently, gold is holding at the same price, roughly, as the S&P 500. For them to perform equally, gold would have to go up 2% to account for dividends from stocks. Based on the above, definitely fallible indicator, and considering various measures of investor optimism re stocks, outperformance in the months and year ahead for gold is my guess.

Copyright (C) Long Lake LLC 2010