Unfounded Rumors About CEF And SBT
by Dave Kranzler, Investment Research Dynamics
An email went “virile” in the precious metals and truthseeking community about a hedge fund which had allegedly purchased 10% of both CEF (Central Fund of Canada) 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 CEF 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 CEF. It was clear from the information that this was the hedge fund referenced in the “virile” 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 “virile” email.
Polar Securities is looking to change the charter of CEF in order to enables shareholders to redeem shares for bullion. Unlike the Sprott bullion funds, CEF does not allow shareholders to redeem share for bullion. Because of this, CEF must be considered a derivative security. It is largely for this reason that CEF has traded at a significant discount to its NAV for the last several years. Currently it is trading at 7.4% discount. This means that the market value of the shares are worth 92.4% of the market value of the gold/silver/cash assets in the Trust.
It is my strong view that if CEF 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.