By Ivan Y.
Central GoldTrust (GTU) is a closed-end fund holding gold bullion that provides an alternative to SPDR Gold (GLD) or owning physical gold coins & bars. The fund currently trades at a 4.8% discount to its net asset value. I have mentioned this fund a couple of times in the past several months and I continue to be baffled why gold investors initiating new positions would buy GLD instead of GTU. Besides the discount, GTU also has a major advantage when it comes to taxation because GTU gains qualify for the long-term capital gains rate of 20%. On the other hand, GLD is considered a collectible and thus gains would be taxed at the collectible rate of 28%. The same collectible rate applies to gold coins and bars. Given the discount and the lower taxation, GTU is clearly the better option.
The argument is more debatable if you compare GTU with owning gold coins and bars. While GTU owners get a more favorable tax rate, they have to pay an annual expense every year of 0.36%. Holders of gold coins and bars have the option of paying no expenses if they want to just keep it at home or in a safety deposit box without any insurance. But in my mind, that's a risk that isn't worth taking for large amounts of gold. What if someone broke into your house and stole it? You would lose everything. Another disadvantage of holding physical gold is that you have to pay a premium in order to purchase it. Nobody will sell it to you at the spot price. Just go to Ebay and search for "1 oz. gold coin". When I checked, the best price I saw was about $50 above the spot price for a South African Krugerrand. In general, if you buy a 1 oz. gold coin, you should expect to pay at least a 3% premium to the spot price. Finally, you also need to keep in mind the possibility of the government confiscating your coins and bars like they did in 1933. I think the possibility of this happening again is slim to none, but I know that there are a lot of gold investors who worry about this.
Calculating The Discount
How do you know what the discount is? You could go to GTU's website, but the discount (or premium) they show you is not accurate because they base it on the London fixing price. The London market closes several hours before the U.S. markets close, so the gold price there is always out of sync with the U.S. price. If they are the same, then it is by coincidence.
So here is a simple formula that you can use to calculate the discount to net asset value for GTU using real-time prices. First you need to obtain the following information:
- The current price of GTU and current spot price for gold. I usually check the spot price on Kitco.
- The amount of gold ounces held by GTU (currently 704,652). You can see that here.
- The amount of cash held by GTU (currently $14.85 million). You can see that using the same link.
- The shares outstanding for GTU (currently 19,299,000).
Second, calculate the net asset value:
NAV = (Spot price * Ounces + Cash) / Shares outstanding
Then calculate the premium or discount:
Premium/Discount = (GTU price - NAV) / NAV
I use Excel to do the calculation. Here is a snapshot of it.
I know that many closed-end funds trade at a discount to net asset value. In my mind, that is a joke and it serves as proof that even a free market can misprice things. If you want more egregious examples of mispricing, just look at overpriced stocks like Salesforce (CRM) and Tesla (TSLA).
I am currently down about 5% on my pair trade (long GTU, short GLD). Since my broker doesn't charge me any fees on the short position, I have no intention to unwind it and plan to hold it until GTU trades at a premium.
Additional disclosure: Long GTU, Short GLD