MNT – Divestor

Buying gold at a discount

Random market observation of the day.

Royal Canadian Mint Exchange-Traded Receipts (TSX: MNT) represent 0.0105516 troy ounces of gold per ETR. This is slowly reduced by the 0.35% annual expense.

Normally this ETR has traded at a premium to spot gold, but for whatever reason, today they are trading at a 2% discount. I noticed this when MNT was down 3% today while gold was flat.

This is like getting a US$35/ounce discount on spot gold. Physical gold typically has around a 4% mark-up.

Redemption costs are relatively reasonable – a 10,000 ETR redemption (the minimum) incurs a 0.9% fee (to get delivered 3 kilogram gold bars plus some residual cash). Getting your gold out in 1 ounce gold coins is considerably more expensive – about 5%.

I have no idea why the discount is suddenly happening today, perhaps a fund or somebody wants to unload it into the market, especially considering the rest of the market is on fire. Gold is a yellow metal that just sits there and looks pretty, and in the form of an ETR, it is even less exciting than a cryptographically-encoded digital collectible. Gold earns a negative income sitting there, compared to Gamespot or some other instrument of legalized gambling.

Sprott has a 64% gold and 36% silver hybrid (TSX: CEF) which has an even higher discount (about 3.9%), but it is considerable more expensive to hold – 0.53% MER. Sprott’s physical gold equivalent (TSX: PHYS) has a 2% discount and a 0.45% MER.

Perhaps there is some sort of arbitrage going on between these two funds.

Gold is out, crypto (or almost anything else) is in – and FOMO

For the first time in ages, the Royal Canadian Mint ETR (TSX: MNT) is trading within a percentage point of its net asset value – prior to this it was trading at a significant premium.

This could be because the price of gold, at least as measured in US dollars, has declined from a high of about US$1,950 during the election to US$1,800 today and suddenly gold is no longer in vogue. It is difficult to prescribe what causes price decreases in gold, but given its perception of a “when everything goes to hell” metal, my guess is that the fallout of the presidential election is alleviating to those that went into gold.

Another solution espoused by monetary doomsday proponents is the purchase of cryptocurrencies.

Here is my current theory of how things will end up.

You’re going to continue hearing more and more about Bitcoin until the last dollar has been sucked up into this global Ponzi vacuum – it’s up about US$1,000/coin today. The price is going to continue to rise because of forced buying (ETFs) and rampant speculation (easy access through financial apps that can be loaded on anybody’s smartphone). You’re going to hear your friends, neighbours, etc., get into the action, and you will be aggravated to hear about fortunes made because they bought half a bitcoin and it went up ten-fold in a month, while you are just sitting on your boring shares of Fortis and Enbridge, clipping quarterly dividend coupons at a hundred times less magnitude.

The disparity in performance going to drive a lot of people insane. Literally insane. Seeing your friend pull up to your doorstep in a Lambo (“Look! I sold some bitcoin!”) while you’ve just made an extra value meal in dividends fuels a lot of psychological resentment. After finishing drag racing on the freeway in your friend’s Lambo, picking up your Big Mac and fries at the McDonalds drive-through with your dividend cheque, you both will then go home and buy some more bitcoins.

All I can suggest to keep your sanity is to go to the library (assuming your local branch hasn’t been shut down by the COVID scourge) and get some history reference books on what happened during the Dutch tulip bulb mania. This is the closest analogy I can think of to the current situation. One difference between the 17th century and today’s era is that in today’s era, things move much, much faster, including Lambos vs. horse carriages. This includes price movement and capital mobility. The Tulip Bulb mania took about 3 years to form, and the crescendo went over about four months of trading. With bitcoin, I would not be shocked that the initial collapse will be a price drop of over 50% in a 1 week period. It will be massively disruptive.

You will also hear at the same time after this price collapse a bunch of people saying this is the greatest chance to get in of all times.

Most people in finance have some knowledge of the Tulip Bulb Mania. However, many less people (including Wikipedia) have a historical knowledge of another great pyramid scheme which brought down the country of Albania in 1997. This made for a very fascinating study although there were few references to it in English. Another difference is that Albania wasn’t exactly a rich country at that time, so the absolute amount of capital sucked into this scheme was relatively limited by comparison, while Bitcoin has a nearly global audience.

History is repeating again, right before your very eyes! What a time to be living.

How do we begin to model this?

Unlike Tulip Bulbs, which trade in discrete quantities, Bitcoin is divisible in units of 100 millionths of a bitcoin, which means anybody will be able to get into the game – with Tulip Bulbs, the purchasing power of one bulb at its peak was massive, which limited the ability for people to get in (they had to put up margin collateral). With bitcoin, anybody with a cell phone and a bank account can get in.

There are about 18.6 million bitcoin outstanding at present, with a good chunk of this (at the onset of creation) apparently not used, and with people losing coins here and there. At US$19,000/coin, the market capitalization of the entire bitcoin set is US$350 billion. I think you can now make a good argument this could go a lot larger before the bottom falls out on this one. I initially thought the market cap of bitcoin would be roughly restricted to the largest cap companies trading on the public exchanges (currently, this would be Apple at around $2 trillion) but for a true mania, shouldn’t it go higher? There’s clearly room to head up to $100k/coin. The question is – how much cash will this suck up before demand stops?

Kind of makes my earlier predictions half a decade ago of a $10k ceiling to be pretty ridiculous, but then again, I never knew Bitcoin would be the vessel of the next tulip mania. Times really haven’t changed.

Royal Canadian Mint ETR premiums

In Canada you can directly invest in gold by buying (TSX: MNT), which currently represents 0.0105808 Troy ounces per unit (this goes down slowly to reflect the 0.35% MER).

Normally the trading price of this product is close to the net asset value, but presently there is a huge premium involved.

This second as this is being written, the NAV is $24.81 while the market value is $26.99.

This is an 8.8% premium above NAV, which is very expensive and more so than it has typically been, especially during and after the CoronaCrisis.

You can redeem for physical with 10,000 ETRs, which would be good for 105.808 troy ounces, or nearly 3.3 kilograms.

The redemption fee for this (assuming you receive 3 kilobars, and the remainder in gold maple leaf coins) is about US$2,500, plus shipping and insurance. This is roughly 1.3% of the whole purchase price.

One would intuitively think that the NAV premium would be restricted somewhat to the cost of delivery.

Because you can’t just deliver physical gold to MNT, the only method to equalize this arbitrage is for the Royal Mint to sell units of MNT to the public at a premium to NAV (skimming the difference).

Best ways to obtain gold exposure

The purpose of this article is to go over the various ways one increases exposure to the gold commodity. Clearly while investing in gold producers is another method, I will leave that for other smarter individuals.

The hypothetical investment is a CAD$10,000 or US$7,400 investment in gold. With institutional levels of capital, there are other facilities to expose oneself to gold. For the purposes of this article I am assuming a US$1,220/Oz price and a 0.74 USD/CAD exchange rate.

The largest gold ETF is (NYSE: GLD) and they are massively liquid. The MER is 0.40%. The next largest gold ETF is (NYSE: IAU) and they charge an MER of 0.25%. I would recommend IAU strictly on cost differentials – both have volumes that are well above retail levels. In terms of security, the custodian of GLD is HSBC, while the custodian of IAU is JP Morgan Chase. My very unprofessional ranking would put the two level in terms of security, hence IAU is the winner on costs. At today’s gold prices, you would be able to purchase 6.06 troy ounces and pay about CAD$25/year for the warm and snuggly feeling of it being safe. Purchase and disposal costs the price of a trading commission. GLD and IAU are denominated in US currency.

In Canadian currency, the best bet (and indeed, the only bet) is (TSX: MNT) which carries the unique feature of being backed by the Government of Canada and at an MER of 0.35% (thus a yearly maintenance of CAD$35/year). Its only apparent drawback is liquidity – bid-ask spreads typically are between 10 to 20 cents so this is not a product where you would want to place market orders. Each unit is currently equivalent to 0.0107125 troy ounces of gold. Purchase and disposal costs the price of a trading commission. MNT is legally an exchange-traded receipt (ETR) and they do trade above and below net asset value like ETFs.

Another option is purchasing the physical product. These suffer from three issues – divisibility of the product, transport, and storage. Looking at online vendors such as Kitco, you can purchase a 100 gram gold product for CAD$5,430. Pretending you can buy CAD$10,000 of product would result in 184 grams of gold or 5.92 troy ounces, which is a significant spread off market pricing. Getting it in one ounce gold coins results in a net gold mass of 5.86 troy ounces. Also, once you buy the product, you also have to pay to have it shipped (CAD$30) and insured (CAD$40 for a $10,000 purchase), which also adds to costs. Finally, it has to be stored somewhere securely – a bank safety deposit box is CAD$65/year at RBC, but these boxes are not covered by any insurance if there were circumstances that would cause them to be stolen or destroyed. Also, if the gold is to be subsequently liquidated, there will likely be additional frictional costs.

As a result, I do not believe that physical storage of gold is feasible on the retail level beyond trinket sums of capital.

The last option is using financial derivatives to emulate the price of gold. The best option is to use gold futures on CME. These are extremely cheap to trade and are liquid products, but suffer from the primary drawback of being in lots of 100 troy ounces. Margin requirements to hold a gold contract (US$122,000 notional value) overnight is US$5,400, so from a capital maintenance perspective, if your desire is to hold 100 troy ounces of gold, I would prefer utilizing futures. Clearly this is not a viable option if one’s intention is to invest CAD$10,000 in gold.