Dear Friends,

For 45 years, Central Fund of Canada has offered investors a way of owning gold and silver in the form of shares which can be easily traded in any stock account (including an IRA). Their fund trades under the symbol CEF on the American Stock Exchange. The fund's assets are currently about 56% gold bullion, 41% silver bullion and 3% cash. About 3 years ago, they came out with a second fund, Central Gold Trust (symbol GTU on the New York Stock Exchange) which is 98% gold bullion and 2% cash. Then a month ago, they created a third fund, The Silver Bullion Trust (currently trading under symbol SVRZF on the US Over the Counter Pink Sheets), and currently holding about 90% of its assets in silver bullion and 10% in cash.

It is this third fund which presents a unique opportunity, for at least two reasons:

1. I consider Central Fund the safest form of "paper" gold and silver in the world. Only holding the physical metal in ones own possession is safer, and under some conditions even less safe than Central Fund.

2. Since all of Central's funds are closed-end funds, they trade like a stock on the exchange rather than at net asset value at the end of each trading day as do all open-end funds (the vast majority of all mutual funds are open-end). This means they trade both above and below their net asset values based entirely on supply and demand. This creates opportunities to buy at a low premium, or a discount, and sell at a higher premium, creating a gain entirely separate from any gain in the metal itself. For more details on Central Fund and the difference in open-end and closed-end funds, see Central Fund of Canada (CEF) and Arbitrage.

Note: Paragraph 3 from the original article has been deleted, as it no longer applies. If you are interested in this investment, be sure to read the article, Notification of an Error I made on SVRZF. 

DISCLAIMER: As always, this is not a recommendation. It is a disclosure of an investment I am making, and which I consider a great opportunity. I presently hold a 2.3% position in SVRZF in my portfolio. Even though I already have more than my full target allocation to silver, I will likely add to my SVRZF position, which means I would have to give up some of my cash, or some other asset until the potential of this opportunity is past. I might even diversify some of my physical silver into SVRZF. Then if SVRZF rises to a significant premium over it's net asset value, I would be in a position to reverse the switch from SVRZF back to physical metal creating a nice arbitrage profit in addition to any increase in the value of silver. I have done this several times in the past.

If you have no interest in this investment, you may want to stop reading here. If you do have an interest in this opportunity, I strongly recommend you go to the Silver Bullion Trust web site, www.silverbulliontrust.com, and study all the information. Be sure to read the prospectus. You can learn a lot.

QUESTIONS AND ANSWERS

Q: Why might I want to buy SRVZF?

A: I can think of two situations in which SRVZF would be an ideal investment, (1) you are below your target allocation for silver, so you could use it to bring your investment up to the desired allocation. (2) You already hold SLV, or some other paper form of silver. In my opinion, a dollar for dollar switch from SLV to SRVZF would be a great investment. If both situations apply, you could sell all your SLV and buy the amount of SVRZF required to bring your silver allocation to the desired level. This is what I have done.

Q: How should I go about buying SVRZF and/or switching SLV to SVRZF?

A: This is a very important question because the total capitalization of SVRZF is small, and the fund is new and largely unknown. There are two things I must know before I enter an order.

1. The price at which the last trade took place. The last trade is easy to get. If you have quote update on your computer, just enter the symbol SVRZF and click go. If not, your broker can get it for you.
    

2. The approximate net asset value (NAV) of the fund based on the current spot price of silver. If you go to the Silver Bullion Trust web site and click on Net Asset Value, you will see the NAV quoted in US$ per unit at the preceding day's close. That will usually be accurate enough. But if you want to be even more accurate (if the silver market is volatile), calculate the ratio of the current spot price of silver divided by the London Silver Fixing shown on the web page, and apply that ratio to the Net Asset Value per unit (US$) quoted at the top of the page. That will get you closer to the exact NAV.

Here's an illustration of the next step. Suppose the last trade was at 9.80, and the current NAV (whether calculated or from the web page) is 9.90. I would add 3 to 5 cents per unit to the price (let's say 4 cents for the illustration). I would then enter an order to buy at a limit of 9.84.

CAUTIONS: 

1. I would use a DAY ONLY order. If the order didn't fill by the end of the day, I would wait till the stock opened the next day, then enter a new day only order at the appropriate limit.

2. UNDER NO CONDITIONS would I pay more than 5% over the NAV.

3. If I am doing a switch from SLV, I would not sell the SLV until after the buy of SVRZF filled. I would then immediately sell the SLV AT THE MARKET.

Make sure all three conditions (A), (B), (C) are met.

Q: Do you think Central Fund will seek the get their new Silver Bullion Fund listed on one of the US major exchanges?

A: I definitely do, and I hope it will be soon. But please understand, if this happens, many new investors will learn about it, and the opportunity to buy the fund at a small premium or discount to NAV will probably be gone. In fact, that opportunity could disappear at any time from now on. I just have no way of knowing. I'm not waiting to find out. I'm buying now.

Best wishes,

Jay