Gold ETF – Canada
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 or simply hold large quantities of cash. The gold in the name is 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 like the prospects of a fund manager they will change over time. When you invest in GTU you are truly investing in gold.
Is the Price Worth it?
Currently the price of GTU is about 8 times earnings. Normally I don’t like to buy any stock that has a price to earnings greater than what I perceive its annual growth to be. If you believe that gold will grow greater than 8% per year over the next couple of years then this could be a great buy. However, this Canadian gold ETF is so purely a gold purchase that I would have to factor in the main purpose of buying gold is as an inflation hedge and diversification from a all corporate equities portfolio. So even if gold only grows 4% per year giving you a PEG (price / (earnings * growth)) of around 2.0 this is still a good buy to balance a portion of your retirement account.
Why a Canadian Stock ETF Versus Real Gold?
There are two main reasons I prefer a gold exchange traded fund to buying actual gold:
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 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.
Tags: Canadian gold ETF, Central Gold Trust GTU, gold ETF, TSX
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