This series of articles does not aim at predicting where precious metal prices will go but at showing investors where they can get more value for their money.
In my last update a month ago, I wrote:
...the probability for gold to break out in the next weeks is higher than it has been at any point in 2017.
Since then, gold price has broken out above the $1,300 resistance. It is likely to go to the next resistance zone between $1,360 and $1,380. The net short interest of commercial hedgers represents 20 million ounces, which is significantly above the average since the bear gold market started in 2012. It may mean that precious metal insiders are not confident the rally will continue much higher.
Gold price weekly chart (finviz.com)
The short interest of commercial hedgers in silver and platinum is also much bigger than last month but smaller than for gold relative to their own historical averages.
The big event in precious metal is Palladium reaching a 16-year high, beating its 2014 “Crimea spike” and coming 10% below its 2000 bubble top and all-time high. This metal, 40% of which is produced in Russia, has two main uses: by the automotive industry as a catalyst and by some investors as a hedge against geopolitical tensions. It often rallies when Russia is in the news, like the day of writing this (9/1/2017). Mr. Putin gave his opinion on the North Korea crisis, and palladium gains 5%. Commercial hedgers are heavily short.
Palladium monthly chart (finviz.com)
I don’t know if it is a good time to buy precious metals as an investment, but there is no bad time to accumulate small amounts as an insurance. For this purpose, some closed-end funds are an alternative to GLD, SLV, PPLT, and NYSEARCA:PALL. The next table shows discounts, premiums, and real metal allocated for some Canadian funds on 8/31/2017.
Tickers +Premium -Discount Annual Fees Central Fund of Canada CEF -5.0% 0.32% Sprott Physical Gold Trust PHYS -0.35% 0.35% Sprott Physical Silver Trust PSLV -0.21% 0.45% Sprott Physical Platinum & Palladium Trust SPPP -2.16% 1.17%
Premiums and discounts are calculated with the price of latest LBMA fixing (12:00 p.m. for silver, 3:00 p.m. for gold).
CEF discount is providing a safety margin of 5%. I don't recommend a long-short arbitrage trade. Borrowing and margin costs may erase expected gains if the trade lasts too long. CEF has traded at a premium between 2009 and May 2011 and has been at a discount between 3% and 12% most of the time since then.
Investors preferring stocks and incomes may consider GAMCO Funds GGN and GNT. Their holdings are mostly precious metal mining companies and dividends are much higher than in GDX. GGN has also positions in energy: Exxon Mobil (XOM), Schlumberger (SLB), Royal Dutch Shell (RDS.A). GNT is more diversified: besides miners it has holdings in oil (Exxon Mobil) materials (Monsanto: MON, Syngenta: SYT), industrials (Deere: DE) and food (Archer Daniels Midland: ADM). ASA is another closed-end fund in precious metal companies.
Tickers +Premium -Discount Dividend Yield Annual Fees Global Gold Natural Resources & Income Trust GGN +1.81% 10.62% 1.26% Natural Resources Gold & Income Trust GNT -1.40% 8.49% 1.36% ASA Gold&Precious Metals ASA -11.74% 0.32% 1.26%
ASA has the best discount. GGN has the best dividend yield, but its market value is above its net asset value, and the yield is based on option strategies: it may be put at risk, like for GNT. These closed-end funds have no additional risk due to leveraging: GGN has a low leveraging ratio (close to 1.1), GNT and ASA are not leveraged. High dividend CEFs like GGN and GNT may suffer capital decay due to ROC (return on capital). However, ROC may be a good thing for investors with a lower tax rate on dividends than on capital gains (Seeking Alpha has readers all over the world and local tax laws are sometimes quite strange and convoluted).
The top holdings of ASA are Randgold Resources (GOLD), Barrick Gold Corp. (ABX), Newcrest Mining Ltd., Agnico Eagle Mines Ltd. (AEM), Newmont Mining Corp. (NEM), Goldcorp Inc. (GG), Royal Gold (RGLD), Franco-Nevada Corp. (FNV), Anglogold Ashanti (AU), Cia de Minas Buenaventura (BVN). This group represents about 60% of the net asset value. ASA allows to hold shares of these companies and other ones with an 11.7% discount.
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Fred Piard
Fred Piard, PhD. is a quantitative analyst and IT professional with over 30 years of experience working in technology. He is the author of three books and has been investing in data-driven systematic strategies since 2010.
Fred runs the investing group where he shares a portfolio invested in quality dividend stocks, and companies at the forefront of tech innovation. Fred also supplies market risk indicators, a real estate strategy, a bond strategy, and an income strategy in closed-end funds. Learn more.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I am long foreign precious metal funds.
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