Trader’s Narrative

As gold bullion made a third attempt at the round number $1,000 there is a rush to feed a seemingly insatiable demand for gold securitization:

The most recent related IPO was the Claymore Gold Bullion Trust (CGL.un) on the Toronto Stock Exchange. Claymore is a small but innovative Canadian based asset manager and they’ve created a unique product. For starters, the fund will hedge almost all of its currency exposure to the US dollar. So Canadian investors will hold gold in Canadian dollars, not against the US dollar. Second, although structured as a closed end fun initially, if there is a persistent discount to NAV, it will convert to a ETF at the NAV (and therefore, eliminate discounts/premiums that plague all CEFs).

The Claymore Gold IPO was oversubscribed ($460 million Cdn) with over half being taken by large institutions. What really made Claymore’s product attractive to US institutions especially is the different in taxation schemes. By investing in an ‘offshore’ security, US investors can avoid the 28% luxury tax they would normally have to pay for holding gold and instead pay a much smaller 15% tax rate.

In the end, I can’t help but remember what we should have learned long ago: Don’t Buy What Wall St. Sells.

So is Claymore’s Gold IPO a signal for a top in gold?

Consider that the Claymore Gold CEF (probably ETF in due time) joins a quickly crowding field. Sprott Asset Management launched their Sprott Gold Bullion Fund, an open ended mutual fund earlier in the year. These join the existing two gold funds: the Central Fund of Canada (CEF) and Central Gold Trust (GTU) - both of which took advantage of the appetite for gold to raise $200 million each via a secondary offering last month. Even more interesting, the secondary offerings for both of the existing gold CEF’s were done at premiums to NAV.

But all of these funds pale in comparison to the SPDR Gold Shares ETF (GLD), which believe it or not, holds more gold than the Swiss central bank.

Those who bought this IPO placement (Thursday May 28th, 2009) from their brokers at $10 were immediately underwater:

Right now there is a small discount to NAV and the only consolation is that Claymore will convert from a CEF to a ETF if it persists for a few more months. But of course, the value of gold will play a much more important role in whether this was a smart investment or not.

Remember that last year Sprott flagged the top of the commodity bull market by issuing their own IPO. If we’ve learned anything about market timing, it is that when the ducks quack, Wall St. feeds them.

Wow, what a ride! The AMEX Gold Bugs Index (HUI) rallied 100% within two months. I was bearish on gold in October 2008 but saw technical support around 175 which is where the most recent rally lifted off from.

The funny thing is that gold has clearly shown itself to be just another commodity to be traded and not “real money” during this crisis. You can’t but help notice the resemblance of gold stock prices to general stock market prices. If you are still a dyed in the wool $2000 an oz. gold bug, then you have to re-examine your stance when the threat of total global credit and financial meltdown can’t push gold up.

In any case, looking at gold sentiment, it seems that this recent rally has given too many, too much optimism about the metal. And this usually means that it is the end of the ride.

According to the Hulbert Gold Newsletter Sentiment Index (HGNSI), the average exposure that market timing newsletters are suggesting for gold is 75.2%. To put that in perspective, that’s an almost 4 year high. It is even more gloomy when you consider that when gold was nearing $1000, this same sentiment measure was only 64.3%. Obviously gold is now much lower, but this 100% rally has made many people become “believers” yet again.

Another sentiment measure is also finding too much excitement for gold. The chart below shows the Central Gold Trust (GTU) share price with the premium/discount to NAV plotted below. Since the trust simply holds gold and silver, it is easy to calculate what it should be trading at. But right now, people are paying astronomical amounts over and above the real value of this security:

You can read more about Decision Point’s discussion of gold here.