Time to Buy Bullion?

09/05/2016 9:00 am EST

Focus: FUNDS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

With the gold buying season ahead, it looks like a good time to add to our holdings in the sector, explains Jack Adamo, editor of Insiders Plus.

Central Fund of Canada (CEF) holds precious metals. Indeed, 95% of its holdings consist of either gold or silver bullion.

The fund’s metals are stored in the highest security treasury vaults at a Canadian government chartered bank on an unencumbered, allocated and segregated basis.

That means that the assets are held separately from others and no one has any claim on them except the shareholders.

In terms of its make-up, 59.1% of the fund's value is in gold; 40.2% is in silver, and 0.7% is in cash and other assets.

The Central Fund of Canada has long been recognized as the best-managed investment vehicle of its kind.

Another reason we're choosing the Central Fund is that it is selling at a 5% discount to net asset value. Over the last 10 years it has sold at an average premium to NAV of 2.5%.

Hence, if the appetite for precious metals picks up again, on top of whatever the actual bullion prices appreciate, we should get an extra 7.5% bump (the spread between -5% and +2.5%).

For those unfamiliar with closed-end funds, they are a type of mutual fund, however, unlike regular mutual funds, which issue new shares to meet investor demand, closed-end funds do not.

There is a set number of shares with which to buy the underlying stocks, bonds, futures, bullion or whatever.

Hence, when the fund holds assets investors crave, it tends to drive up the share price of the fund. The opposite occurs when the underlying asset is out of favor, as gold now is.
I cannot swear that gold and silver have bottomed. In fact, if we slide into recession, they will both probably slide as well.

However, from both fundamental and technical perspectives, it looks to me like the long-term trend for gold and silver has stabilized and will work its way up from here, cyclical factors aside.

In addition, gold holdings provide inflation protection for our portfolio of preferred stocks, which tend to lose value in inflationary times.

That doesn't appear on the horizon, but with the Fed Gone Wild coming back on the air again, we have to be prepared for it.

The shares of Central Fund are pretty stable lately and liquidity is good in the shares, so we can keep a close buy limit on them.

Nonetheless, I'd buy them with a limit order rather than a market order in case the market heats up. Should we get a further pullback this summer, we may add to our position again.

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By Jack Adamo, Editor of Insiders Plus