Gold ETF | Gold ETF – Canada

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Gold ETF – Canada

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If you’re looking for a purely Canadian Gold ETF, Canada has one you may wish to consider; Central Gold Trust (GTU on the New York Stock Exchange or GTU.U on the Toronto Stock Exchange, TSX.)   Though technically a closed end fund (CEF), it trades on the stock market just like an ETF and the big advantage to the Central Gold Trust is that it’s a pure gold play, meaning its primary holding is gold.  As of the beginning of 2010 GTU’s assets consisted of 97% gold bullion, 1.5% gold certificates, and 1.5% cash for basic working capital.  While this seems like it should be obvious many named gold funds actually trade through many other precious metals, gold futures, or simply hold large quantities of cash.  The gold in the name is likely used to attract less sophisticated investors.

While some gold funds may be able to perform better, it is more difficult to determine how the fund intends on making money without understanding the fund manager who is employed at the time.   Even if you like the prospects of a fund manager they will change over time forcing you to keep up-to-date with who’s currently managing the fund.  When you invest in GTU you are truly investing in gold.

Why a Canadian Stock ETF Versus Real Gold?
I like owning both but there are two main reasons I prefer a gold exchange traded fund like GTU over buying actual gold:

Tax Efficiency – Gold ETFs are taxed more efficiently than holding gold bullion so come TurboTax time, you’ll be much happier with the ETF in your portfolio vs. the yellow metal. The reason for is that gold ETFs are considered a long term investment, and thus taxed at a lower rate, if held for 1 year. Gold bullion on the other hand must be held for at least 3 years to be considered a long term investment and reap the lower tax benefit.

Liquidity – The reason you invest is to convert your investments into goods in the future.  Sometimes a trip to Hawaii is just nicer than a hunk of metal.  When you purchase physical gold and keep it yourself you have to find a broker to convert the gold back into cash.  This involves an appraisal, shipping, driving, phone calls, or other general nuisances getting between you and your money.  An ETF is traded over a major stock exchange through your normal stock broker.  A sell order will be transacted in moments with your cash virtually instantly available.

Reasonable Spread – The spread is the most ignored fee in investing.  The spread is the difference between what the market makers are selling an equity for versus what they are buying them for. The spread on stocks is about 1% of the purchase price. This means the gold ETF needs to earn 1% before you earn a penny.  Owning gold has a carrying cost of around 7%. If you don’t plan on holding gold for a length of time this 6% difference can bite into your earnings.

Is the High Price of GTU Worth it?
There is little doubt that in the long term the SPDR Gold Trust (GLD) will likely outperform GTU as you are paying a slight premium to owning GTU. So why invest in GTU at all? Well firstly if you’re Canadian it’s convenient that the fund is priced in both CDN via the TSX and USD via the NYSE allowing you to hold the ETF in your RRSP without incurring foreign exchange fees. However the main benefit of GTU over other ETFs (including GLD) is that unlike other funds, Central Gold Trust does not lease out your gold. Instead they always keep at least 95% of their holdings in insured and fully segregated physical gold. So as far as safety is concerned it doesn’t come much better than this other than storing your own physical gold in safety deposit box of course, which isn’t a bad idea in itself.

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2 Comments

Comments

2 Responses to “Gold ETF – Canada”

  1. loaddown on January 5th, 2011 8:23 pm

    This is the most comprehensive page on the subject, thanks. One observation, I believe CEF splits their assets between gold and silver. Their website lists 51.7% silver, 46.7% gold and 1.7% cash. I’m not sure of your mingling CEF with GTU, which you quoted the asset distribution for, but they offer choices between them. I prefer CEF right now, with silver lagging in the ratio between them as well as becoming more scarce. I agree with your other conclusions.

  2. David on January 11th, 2011 7:39 am

    Hi loaddown,

    Thanks for your comment. Yes you are absolutely right and the Central Fund of Canada (CEF) is another interesting prospect which I’m also fond of. Sorry for the confusion, when I mentioned CEF, I was actually referring to GTU being a Closed End Fund (CEF).

    David