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Canadian mint's gold and silver funds trade at a discount to metal value

Section: Daily Dispatches

On Sale Now: Canada's Gold Reserves

By Martin Mittelstaedt
The Globe and Mail, Toronto
Wednesday, May 29, 2013

There's gold and silver on sale on the Toronto stock market, courtesy of an unusual source: the government of Canada.

The Royal Canadian Mint has issued two exchange-traded receipts, one representing a weight of gold, the other a weight of silver, that are currently trading for less than the market value of the precious metals they represent.

The discount is modest. For the gold ETR, it was 1.7 per cent on Wednesday; for the silver receipt, slightly less than 1 per cent.

Still, it is uncommon to find securities exchangeable for precious metals worth less than their current metal prices, especially when the securities are backed by the mint, which is backed by the full faith and credit of the triple-A-rated federal government.

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"We're trading at a bit of a discount. We aren't exactly sure why," comments Steve Higgins, senior manager of investor relations at the mint.

He has been surprised that the securities have been trading so cheaply compared with their metal value, especially since the mint's telephones "kind of went nuts" this year with institutions clamouring to meet investor demand to buy coins and bullion. Demand for gold coins in the first four months soared 123 per cent from the same period in 2012; for silver coins, it’s up 88 per cent.

The discount is particularly unusual considering investors holding enough of the receipts can take them to the mint and redeem them for gold coins or bars held in the Crown corporation’s fortress-like vault near the Parliament buildings. Ever helpful in this department, the mint publishes a list of armoured car companies that can be dispatched to haul away the lucre. To date, though, only two giant 400-ounce gold bars worth about $560,000 (U.S.) each have been picked up.

"We don't like people pulling up with their pickup trucks or anything along those lines" for security reasons, Mr. Higgins explains.

The discount has arisen as investors dumped the securities following the swoon in precious metals prices in February and April, and is a sign of how disenchanted markets are toward the one-time havens. Both securities previously traded for more than their metal value. The gold receipt, which trades under the ticker symbol MNT and was issued in 2011, once had as much as a 10-per-cent "premium," or excess value over the underlying metal value. The silver receipt trades under the symbol MNS.

Many investors may be unaware of the two receipts, which combined represent only about $550-million worth of precious metals. That makes them small fry compared to the giant SPDR Gold Trust, the world's largest gold fund, which holds a stash of worth about $45-billion.

To be sure, the mint's securities are slightly different animals than the SPDR, which represents an interest in a fund that holds gold bullion. In the case of the mint's receipts, investors have a direct interest in actual metal held in safekeeping by the mint.

The SPDR tracks its actual gold value because the fund redeems and creates securities, as needed, on a daily basis to meet demand. For the mint's receipts, there are a fixed number of securities outstanding; their value can depart from the worth of the metal they represent based on the rise and fall of investor demand.

The federal government could buy the receipts and pocket the discount itself, but doesn't intend to do so. Major investors holding at least 10,000 of the gold ETRs or 5,000 of the silver ones could also redeem them for metal and acquire holdings at a below-market price.

Chris Carkner, mint sales director, said demand for gold and silver coins began rising sharply just after the U.S. election, and received another boost this year when precious metal prices sagged in February and April. Sales have been up around the world, including in the U.S., Singapore, Hong Kong, and Germany, where silver coins are popular. In the first four months of the year, the mint sold 440,000 ounces worth of gold coins and nine million ounces of silver coins.

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