Central GoldTrust Close To Historically High Discount

Dec. 1.13 | About: Central Gold-Trust (GTU)

Looking at prices over the last five years, the Central GoldTrust (NYSEMKT:GTU) is selling at historically high discount presenting the opportunity for a pairs trade with GLD (or IAU).

GTU is a closed-end fund based in Canada that holds 98.50% of its assets in gold. 97.60% is in gold bullion, 0.90% in gold certificates and 1.50% is in cash. Because it is almost all gold, the net asset value of the fund will closely track the price of gold.

Looking at the last day of the month since November of 2008, according to data from CEFConnect.com, GTU has generally sold at a premium to its net asset value. However, with gold being so out of favor, GTU is now selling at a discount of about 7% as of 11/27. The 52 week high was 7.89% and that was hit on 11/26/13. Even at 7%, that discount is still greater than the month end price of every month since November of 2008. The discount was as low as 4.46% as recently as 11/6/13.

This historically high discount might present a good time to consider a pairs trade by going long GTU and going short GLD (or IAU). GLD should closely track the price of gold, so a trade like this would be bet on the GTU discount narrowing. Of course, the main risk would be that the GTU discount gets even wider, resulting in possible losses.

Using the closing prices from 11/27/13, here is how the transaction might work out if the trader had the good fortune of the discount narrowing to the 11/6/13 spread of 4.46%. This example assumes an investment of about $10,270 with a $7 commission and no other expenses such as a short borrowing fee or margin fee.

Go long 239 shares of GTU and short 86 shares of GLD. The net cash outflow is $5.49.

Assuming that the price of gold does not change, and assuming that GLD trades at the same spread to net asset value as when the transaction was originated, and assuming that the GTU spread narrows to 4.46%, this trade can be exited with a net cash inflow of $261.78. Combined, the overall profit would be $256.29.

Please note there can be considerable risk in a trade like this, so always consult a financial advisor and do lots of research.

Click to enlarge

Disclosure: I am long GTU. 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.

Additional disclosure: and short IAU