Unfounded Rumors About GTU And SBT – Dave Kranzler

TND Guest Contributor:  Dave Kranzler

Note: I errantly referenced CEF in the original post. The fund at issue is GTU, the Central Gold Trust – the issues at hand remain the same AND they apply to CEF.  However, that being said, the senior management and directors of CEF, the Spicers, are all directors of GTU and SBT.  All three, CEF, GTU and SBT are strictly derivative securities.  There is no good reason why they refuse to convert into physical redemption funds. 

Furthermore in going thru the GTU prospectus, this trust has more hair on it than CEF.  For instance, it says that it keeps its gold bullion in “the underground vault of one of the largest banks of Canada.”  I have gone through several versions of the prospectus and have not been able to identify the bank or banks which are being used to vault the gold.   This is a key piece of information,  because if Scotia was identified as the vaulting bank and I owned GTU shares, I would dump them immediately.

All three securities trade at approximately the same huge discount to NAV.  One can understand why after going through the prospectuses of each.

An email  went “viral” in the precious metals and truthseeking community about a hedge fund which had allegedly purchased 10% of both GTU (Central Gold Trust) and SBT (Silver Bullion Trust) and was trying to force a change to the Trusts’ charters to enable investors to redeem shares for bullion.   The theory behind the email was that some bullion bank or agent for a bullion bank was seeking to loot metal from GTU and SBT for use in the Fed/bullion bank manipulation of the gold/silver market.

As it turns out, my friend and colleague, “Jesse” of Jesse’s Cafe Americain, received a letter from one his readers about a letter the reader received from Polar Securities soliciting support in voting for Polar’s nominees for positions on the board of GTU.  It was clear from the information that this was the hedge fund referenced in the “viral” email from Monday.

I did some digging on Polar Securities/Polar Capital.  It’s a money management firm in Canada which seeks to make long term investments in undervalued asset plays.  The firm seeks to take an active role in working with management to maximize long term value of an investment.  In other words, it does not appear to be the nefarious “corporate raider” bullion bank agent referenced in the “viral” email.

Polar Securities is looking to change the charter of GTU in order to enables shareholders to redeem shares for bullion.   Unlike the Sprott bullion funds, GTU does not allow shareholders to redeem share for bullion.   Because of this, GTU must be considered a derivative security.  It is largely for this reason that GTU has traded at a significant discount to its NAV for the last several years. Currently it is trading at 7% discount.   This means that the market value of the shares are worth 93% of the market value of the gold/silver/cash assets in the Trust.

It is my strong view that if GTU were to enable redemption of the bullion, the market would price away the large and persistent share to NAV discount.  As an example, the Sprott Gold Trust, which does permit bullion redemption, currently trades at .25% discount to NAV and it has always traded either at a slight discount or premium.   This is because the bullion redemption mechanism acts as a check and balance on the integrity of the fund.

While CEF claims to hold 85% of its investments in physical gold and silver, anyone buying CEF shares on this claim is 100% reliant on faith in the integrity of CEF management and its auditors.  “Faith” is “belief without evidence.”  As with GLD, there is no formal, independent mechanism with which to authenticate the claims of management and its auditors about the true amount of physical bullion sitting unencumbered in the Trust’s vault.  Moreover, the auditor is basing its opinion on documentation supplied to it by the management.

The market’s ability to redeem bullion acts as a free market check and balance in that a bullion trust operator knows that any given time it might be called upon to deliver bullion to a shareholder.   I have never, in over 14 years of following CEF, understood why the Spicer family would not allow redemption of the bullion.  There is no valid reason.

Another big problem with CEF is that its charter specifically states it can hold up to 10% of the bullion in “certificate form.”  Again, “certificate form” is paper gold/silver.  It is another derivative.   This serves no purpose other than to dilute the bullion-backing of the shares.

It is for this reason that I have never invested in CEF, tempting as it may be when it’s trading at 92.6 cents on the dollar.   That discount is market’s way of saying “we don’t fully trust the management of CEF.”

In my opinion, the Polar Securities initiative is something that should have been done a long time ago.   Current shareholders who vote for the changes proposed by Polar will benefit if the changes are voted into implementation, as it will likely eliminate most if not all of the discount to NAV at which the shares trade.

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About Dave Kranzler:

 I spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, I traded junk bonds for Bankers Trust. I have an MBA from the University of Chicago, with a concentration in accounting and finance. My goal is to help people understand and analyze what is really going on in our financial system and economy. You can follow my work and contact me via my website Investment Research Dynamics.  Occasionally, I publish on Seeking Alpha too. As a co-founder and principal of Golden Returns Capital, LLC Mr. Kranzler co-manages the Precious Metals Opportunity Fund, a metals and mining stock investment fund.

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