Is GLD losing out to the Central Fund of Canada?

Dave of Denver today brought up the story concerning the latest filing for the Central Fund of Canada (my underline)

"Finally, in what can be seen as incredibly bullish for the price of gold, the Central Central Fund of Canada (CEF) just filed a prospectus filing for periodic share offerings up to $1 billion. CEF issues stock and then uses the proceeds to buy gold and silver bars, which CEF holds in trust. Unlike GLD, which refuses to show the world whether or not it really holds the gold it supposedly buys with shareholder money, CEF will accomodate any visitor who would like to view the CEF vault with their own eyes."

I think this move deserves closer examination. Let's go back to their previous filing of March 24/08 for periodic share offerings of up to $750 Million. CEF quickly went to work with the following issues of Class A shares (remember these are done at a premium to NAV thereby benefiting existing shareholders.):

July 22/08 $150 million in class A shares
Sept 26/08 $128 million in class A shares
Feb 3/08 $130 million in class A shares
April 16/08 $210 million in class A shares
Aug 13/08 $131 million in class A shares
Total $750 million in class A shares

When the Central Fund buys bullion it is in the ratio of 50 oz of silver for every gold oz. Doing some back of the envelope calculations this new $1 Billion filing will over the coming months translate (using current prices $957 for Gold plus $15 for silver Gold/Silver ratio of 63.8) into the potential purchase of almost 600,000 oz of Gold (or $575 million) and 29 million oz of Silver (or $435 Million).

The pressure this will place on the Silver Price is obvious. For Gold, the picture gets even more interesting when we look at CEF's sister fund the Central Gold Trust(GTU). It had a filing on Dec 8/08 of $250 million and issued the following units:

Jan 14/09 $38 million in Units
May 12/09 $200 million in Units (exceeding the Underwriting Agreement of $175 million)

Following the success of these offers the Central Gold Trust filed another shelf prospectus on May 29th/08 of $800 million, a huge increase over the previous amount. In other words GTU will potentially be adding more Gold ounces than CEF, that is, approx 835,000 oz at current prices.

Despite all this Gold activity this only represent a little over 40 tonnes of Gold. Compared to GLD's alleged holdings of 1061 tonnes these 40 tonnes are peanuts.

But.... Look closer at GLD.

In March/08 when CEF filed its first Prospectus GLD held (they say) 580 tonnes which slowly increased to 651 tonnes on Aug 29/08 and 755 tonnes on Sept 30/08. This held steady until Jan/09 when it jumped to 843 tonnes then, in a huge move, to 1029 tonnes on Feb 27/09. The high was in March at 1127 tonnes. Today they have, they say, 1061 tonnes. So since March/09 their alleged holdings have gone DOWN!

CEF and GTU are prospering, dramatically increasing their holding as a percentage of previous holdings. CEF holds assets of a little over $2 Billion now so adding $1 Billion will increase its size by 50%. GTU has assets of $400 million now so their filing will potentially triple the fund size.

Looking at the above figures one thing stands out. We know a big hedge fund publicly announced they sold their large GLD holdings in favor of direct ownership of bullion. Other market players had to, on this news, reassess their holdings of GLD. The drop in GLD holdings while CEF and GTU (and other Canadian funds) are significantly increasing their holdings at a PREMIUM to the spot price tells us something important is taking place. Why pay a premium over spot when you can buy GLD at spot? The market watches GLD closely and used to take an increase in their alleged holdings as a bullish development. However, in this new environment where GLD is suspect, a drop in their holdings may indicate movement out of paper gold into the real thing. And that would be very bullish indeed!

Meanwhile, let's see how quickly CEF/GTU enter into new Underwriting Agreements.

Cheers from Auckland,

Ed Wener ed.na@xtra.co.nz