Gyroscopic Investing

Agree.

Does the concept of "proven" reserves imply a cost of extraction?  Or is that in the footnotes?  I suspect that the market has estimated 1) the probability of proven reserves and 2) the cost of extraction and has discounted accordingly.

Gold in a vault has relatively low extraction costs

WildAboutHarry wrote: Agree.

Does the concept of "proven" reserves imply a cost of extraction?  Or is that in the footnotes?  I suspect that the market has estimated 1) the probability of proven reserves and 2) the cost of extraction and has discounted accordingly.

Gold in a vault has relatively low extraction costs

I would think "proven and probable reserves" would imply that there is a mining business required to be involved somewhere down the line to extract those "proven and probable reserves".  I recall most of the gold is in basically inhospitable, freezing terrain in Western Canada that wouldn't be easy at all to mine due to lack of any infrastructure.  It's really interesting that the market would discount the NAV so much because of these factors, etc..  OTOH, Seabridge may even be more valuable than my NAV indicates, see below.  Whoever decides to eventually foot the enormous bill is probably goung to become the largest gold miner in the world.

Valuation reporting

Industry Guide 7 contains the constraining statement that value should only be assigned to Reserves. It is rare that a minerals industry company files a market valuation report for Reserves with the SEC, and few of those that are filed are found acceptable (Baer, 2001). Most of the US- based minerals industry companies are listed on a Canadian exchange instead of a US exchange. Accounting for public reporting of US companies is on an historic cost basis, which includes accounting for the value of Reserves. Therefore, the market value or fair value of Reserves could only  be  relevant  in  a SEC  filing  regarding  a  merger or  acquisition  involving  a  US-listed company.

Unfortunately a considerable number of US minerals valuers sincerely believe the SEC’s notion, expressed in its Industry Guide 7, that only Reserves should be assigned value. This belief does not match the realities of transactions taking place on a regular basis in the market place (Ellis, 2000a). Those show that the value of Resources and exploration potential often reach many tens of millions of dollars, sometimes exceeding the value of any associated Reserves (Lawrence, R, 2001; Ellis, 2000b).

These unintended consequences of the SEC’s actions demonstrate that rules designed to control reporting for securities purposes will also impact on mineral valuations performed for a wide variety of purposes unrelated to securities reporting, unless great care is taken in their drafting and keeping them up-to-date (Ellis, 2000c, 2001b).

I wonder what the "proven and probable" reserves of the San Sebastian mines were?

I'm not all that knowledgeable about mining (I prefer the finished product) but the term "proven" implies some sort of subsurface testing (drilling, etc.) that is then extrapolated to provide an estimate of the target material's extent and quality while "probable" implies a probability of both success and failure.

I wasn't paying close attention to GTU today, but I believe that the morning saw a slight discount and the evening saw a better than 4% premium.

WildAboutHarry wrote: I wasn't paying close attention to GTU today, but I believe that the morning saw a slight discount and the evening saw a better than 4% premium.

This is a good illustration of why I am not a big fan of closed ended funds for the PP. GTU is fine for the VP. But the often wildly unpredictable premium makes it rather ill-suited for tracking the price of gold which is what a bullion ETF in a PP should be doing.

Ad Orientem wrote:This is a good illustration of why I am not a big fan of closed ended funds for the PP. GTU is fine for the VP. But the often wildly unpredictable premium makes it rather ill-suited for tracking the price of gold which is what a bullion ETF in a PP should be doing.

I agree it is something you have to watch if you are considering purchasing or rebalancing, although today's gold market action was pretty exceptional.

I don't know that the PP is interested in tracking the price of gold, though.  It is interested in holding physical gold.  And the ETFs are a surrogate for that gold with minimal premium/discount issues.  With a closed-end fund you can choose to ignore the premium/discount and track it at the net-asset value if you want.

A bad analogy, perhaps, but when you buy physical gold you are essentially doing a closed-end fund type trade, assuming you buy physical gold at a premium to the spot price of gold.  That premium, and the amount of that premium (if any) you can recover at sale, is determined by supply and demand.

Why would GTU underperform GLD by 1.30% on such an up day like today?

Reub wrote: Why would GTU underperform GLD by 1.30% on such an up day like today?

Premium contraction.

Over the longer term I would treat it as market noise.  As long as you buy GTU when the premium isn't unreasonable (I would say 2.5% or so is probably a good entry point), over time GTU is going to track gold pretty accurately.

I am rather uncomfortable with closed ended funds for the gold portion of a PP. There is no way to know how future events will effect their premium/discount. Those things can go all over the board and seriously skew your gold returns either up or down. Closed ended funds are fine for a VP. But I would be a bit leery of them for the actual PP.

MediumTex wrote:

Reub wrote: Why would GTU underperform GLD by 1.30% on such an up day like today?

Premium contraction.

Over the longer term I would treat it as market noise.  As long as you buy GTU when the premium isn't unreasonable (I would say 2.5% or so is probably a good entry point), over time GTU is going to track gold pretty accurately.

I am a big fan of GTU and agree with MediumTex.
If you were to buy bullion from a dealer and sell it back the same day you would probably loose about 3% or more even if the spot price of gold is unchanged.

Quite a spread between GTU and GLD today. So far GTU's up 2.27% while GLD's up 1.31%.

Pointedstick wrote: Quite a spread between GTU and GLD today. So far GTU's up 2.27% while GLD's up 1.31%.

It's just noise.

Over time, GTU is going to track the price of gold, assuming you don't buy it when the premium is too high (i.e., more than about 2.5% above NAV).

See how GTU is outperforming GLD today.

It all balances out over time.

MangoMan wrote: With GTU now trading at a 6% premium, would it be worth selling to capture the premium and reinvest the proceeds in GLD or similar? Obvious tax consequences, as I have a gain...

I don't know your exact situation, but my bet is that it's not worth it unless it's in a tax protected account. 

MangoMan wrote: With GTU now trading at a 6% premium, would it be worth selling to capture the premium and reinvest the proceeds in GLD or similar? Obvious tax consequences, as I have a gain...

It is up to you. I follow GTU premium but I do not sell unless I need to re-balance. If I were very close to a rebalance band and the premium was great enough I would sell a little early. In the past my gold holdings were getting close to 33% and GTU premium was close to 11% and just as I were getting ready to re-balance a little early the premium dropped to 6 or 7% so I did not go ahead and rebalance. I have no regrets,Year to date I am up over 7% I was up over 8% and closing in on 9% but this has not been a good two weeks. I try not to touch my portfolio and keep it as simple as possible. 

Now at -0.1 !!

I know this is an old thread, but probably most relevant.  I happened to look at the 5 year returns for GLD and GTU today and I'm scratching my head:



Summary:
GTU - 9%
GLD - 46%

Did the premium really go from something like +32% to -5%?