Discount pushes Canadian gold trust into open-end EFT

By David Pett
National Post / Financial Post, Toronto
Tuesday, December 15, 2009

http://www.financialpost.com/story.html?id=2340742

Access to gold bullion continues to expand for Canadian investors, after Claymore Investments Inc. announced it will convert the closed-end Claymore Gold Bullion Trust into an open-end exchange traded fund in January.

It's a welcome trend north of the border, as more people have turned their focus to the yellow metal as a cash alternative to the weak U.S. dollar and safe haven from inflation that is expected to grow in the near years to come.

"During the market downturn last year, stocks went into freefall and a lot of people started to look at physical commodities as an alternative [investment]," said Nick Dedes, fund analyst at Morningstar Canada. "With people also worried about inflation down the road, gold is being sought out as a preferred hedge against rising prices."

Claymore said yesterday that it has filed a preliminary prospectus to convert its current closed-end bullion trust to an open-end ETF and expects conversion to the new fund to be complete sometime next month.

The original prospectus for Claymore's bullion trust was issued with their IPO in May. It stipulated the trust would automatically convert into an ETF, if after Nov. 28, the daily weighted average price of the units was trading at a discount of more than 2% of the net asset value for 10 consecutive days.

"Typically a lot of closed end funds trade at a discount to net asset value, whereas an ETF will make it trade tighter to net asset value," says Claymore vice-president Jeffrey Logan. "The conversion should ensure the fund trades efficient and liquid for the retail investor."

Investing only in physical gold bullion stored in 400-troy-ounce bars, the new fund is a pure and simple way to play gold, Mr. Logan says, unencumbered by the management and financing risks that often prevent gold equities from mirroring the exact price of gold.

The fund also has a Canadian dollar hedge that helps reduce the currency risk that is top of mind for investors at the moment given the weakness in the U.S. dollar this year.

"It's a nice currency alternative," says Terry Shaunessy, founder of Shaunessy Investment Counsel. "Any time we can take the currency out of the equation, we will, because who needs that extra ball in the air."

His firm has been swapping out its exposure to U.S.-based SPDR Gold Shares ETF with the Claymore fund, but he remains cautious about holding more than 5% of his total portfolio in physical gold. "We consider pure play gold bullion funds simply as cash equivalents and limit our exposure," Mr. Shaunessy said.

In addition to Claymore's offering, there are several other Canadian-based firms, offering products that invest in physical gold. Sprott Asset Management launched the open-end Sprott Gold Bullion Fund in March and will introduce a new close-end bullion fund, The Sprott Physical Gold Trust, in Canada and the U.S. in the new year.

Bullion Management Group Inc. has also recently introduced the BMG Gold BullionFund, an open-end mutual fund. Closed-end bullion funds listed north of the border include Central GoldTrust and Central Fund of Canada Ltd. and the Horizons BetaPro Double Gold Bullion Fund.

Mr. Dedes says investors looking to differentiate between bullion funds, should watch management fees attached to the investments, but also consider that instead of purchasing actual physical gold, some bullion funds, may purchase gold certificates, a certificate of ownership that gold investors hold instead of storing the actual gold bullion. By doing so this fund have additional counterparty risk to take into account, says Mr. Dedes.

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