The fundamental case for precious metals investment remains strong in light of artificially low interest rates and an exploding money supply which central banks around the globe are using to combat incalculable sovereign debt levels. In the face of these dangerous monetary policy measures, gold represents sound money dating back thousands of years, which certainly pre-dates fiat currencies and Discounted Cash Flow analysis along with any other arguments seeking to discredit the "ancient relic."
Since 1961, the Central Fund of Canada (NYSEMKT:CEF) has offered access to gold and silver bullion designed for the retail investor in the form of a marked-to-market, exchange-traded vehicle with its holdings safely stored at the Canadian Imperial Bank of Commerce. However, as the fund often trades at a premium to Net Asset Value of 5%-10%, investors must carefully evaluate the timing of purchases.
In a release to Marketwire on March 29, 2011, the directors of the Central Fund of Canada (CEF) announced a $360M share offering from its existing base shelf prospectus. On the day following the announcement, shares of the fund traded lower by as much as 2.5% in New York and closed down 1.76% despite strength in gold and silver spot prices.
As the fund typically exhibits a 5-10% premium to its Net Asset Value, a degree of premium compression is to be expected in light of the offering. However, the fund's investment policy states that the fund must "maintain a minimum of 90% of its net assets in gold and silver bullion of which at least 85% must be in physical form."
Therefore, a share offering should not be viewed as dilutive, because management must deploy proceeds from the offering to purchase bullion.
Furthermore, data from CEF Connect, a service provided by Nuveen Closed-End Funds, indicates a 52-week average premium for the fund of 7.54% and a peak premium of 13.17% over the same period.
Accordingly, if you subscribe to the notion that precious metals prices will head much higher over time, the current premium of just 2.81% should be viewed as a buying opportunity for long-term investors.
Disclosure: I am long CEF.