04 August 2009

NAV Spreads of Certain Precious Metal ETFs and Funds and How to Use Them

Let's take a minute to review this chart, which we have been posting for about five years or more, since we appear to have new readers who are not familiar with NAV spreads and their relationship to different types of funds. We have been receiving some remarkably eccentric interpretations of this data and these funds.

SLV and GLD are funds which are targeted to a specific index or price. If the market is efficient, they *should* track their targets which are the *spot* prices of Silver and Gold respectively.

In both cases there are management fees, which are relatively stable, so we would expect the fund to be selling at a slight discount to the actual spot price, and in fact they do.

They accomplish this by buying and selling the underlying metals which they hold, in addition to other assets such as cash. There has been much criticism of both funds in relation to the lack of transparent public audits of their holdings which we will not address here. We would also assume that they buy or sell their share in the open markets as well for short term management, or engage in some arbitrage with other product if they are prohibited from trading in their own shares.

We do watch the fluctuations their spreads, primarily as a way of spotting clumsy arbitrage or short selling attempts by those who do not trade the futures, or as a futures pair if the market becomes inefficient. But these are rare.

Yes, we have read the prospectuses of both funds, and are well aware of what they say, and were around when they were both established. There were some 'issues' about the product and some regulatory and product boundaries they addressed.

CEF and GTU are 'closed end funds' based in Canada. They purchase a set amount of the underlying commodity and rarely sell it. The most significant fluctuation in asset holdings arises from the sale of additional shares in the fund, which does happen on occasion.

Because of this, CEF and GTU are an interesting guage of gold and silver sentiment. In its initial year, GTU traded at a significant DISCOUNT to its NAV, which created an opportunity to patrons of this Cafe to invest in gold 'on the cheap.'

Why do they so often trade at a premium? Because as a proxy for physical bullion, they tend to be offset by the costs of buying and storing physical bullion.

There is a silver fund being created by this same group in Canada, which is not yet available to US investors. When it does become available we will add it to our chart.

By the way, in answering a question received, there is no proper 'spot' market other than the twice daily 'fixing' on the London Metals Exchange. The fluctuating spot price which you may see quoted is a calculation based on the time decay to the 'front month' in the futures market.

We make comparisons therefore not so much between the products on this chart, which can be interesting nonetheless as it was when GTU traded at a discount because of investor wariness. Rather, the most interesting comparisons are product to itself over time. To accomplish this you will have to search back on prior posts, if you do not have a 'feel' for the norms.

When trading a bull market, a seasoned trader will tell you 'to buy weakness and sell strength.' An exceptional trader will tell you to never lose your core position as well. We have not lost ours since 2001, although we have certainly traded around it.

"Spreads" such as these are one input into the determination of what is strength and what is weakness. There are also the familiar chart based indicators as well.

We hope this helps.