On March 19th I wrote a short article for MIDAS about the extraordinary premiums the Central Fund of Canada (CEF) and the Central Gold Trust (GTU) enjoyed at the time. The GTU premium of 30.9% above the London PM fix was bewildering and predictably it soon collapsed to more normal levels. Today, June 11th the premium sits at 6.7%. During the intervening period the Gold price has not moved much so those who bought GTU on March 19th at $46.75 are now sitting on a 18.5% loss, due almost entirely to the premium reduction.

The Central Fund of Canada differs from GTU in that it holds 50 ounces of Silver for every ounce of Gold. On March 19th it closed at $12.44 which was a premium of 18% above its Net Asset Value. Today it closed at $12.62 with a premium of 13.4% above NAV. So despite the reduction in the premium those who bought CEF on March 19th are ahead 1.5% instead of losing 18.5% as GTU did. Why the difference? Because Silver has dramatically outperformed Gold increasing 14.5% during the period.

I concluded my March 19th article with this comment:

"Since the beginning of 2009 Silver has outperformed Gold. If this continues and I’m right, then the GTU/CEF premium should narrow and move in CEF’s favor."

This is exactly what we’ve seen. We can actually calculate the difference by assigning the Gold in CEF the premium GTU enjoys and then figuring what the market is paying for the Silver in CEF. I did this calculation back on March 19th and concluded that with a 30.9% premium for Gold the Silver in CEF was selling for a 7% premium. Today using the latest GTU premium of 6.7% for Gold, I figure the Silver in CEF is selling for a premium of 22.7% above spot or about $18.50/oz .

Investors looking at trading these two Funds clearly have to make a choice based on the current premiums and their preference for Gold or Silver. Back in March it was fairly clear the GTU premium was unsustainable. Either Gold had to quickly rise or the premium had to fall. For the GTU premium was pricing Gold at $1250/oz. Today, with a much more reasonable premium of 6.7%, GTU is pricing Gold at a little over $1000/oz.

On the other hand the Central Fund is clearly predicting a higher Silver price and given that Silver is still over 25% below last year’s high that is not a stretch.

Cheers from Auckland, Ed Wener