A reader asked about Central Fund of Canada Limited (NYSEMKT:CEF) (TSE:CEF.A):
One of the best sentiment gauges for precious metals is whether investors are paying a premium, or if they are buying precious metals at a discount.
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What is CEF
Central Fund of Canada Limited (NYSEMKT:CEF) (TSE:CEF.A) is a closed-end mutual fund that owns gold and silver exclusively — the metals, not stocks — at a ratio of about 45 oz. of silver to 1 oz. of gold. Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding precious metals.
Very recently Central Fund of Canada Limited (NYSEMKT:CEF) (TSE:CEF.A) has been selling at about a -7.5% discount to the net asset value of the gold and silver it owns. Considering that CEF has experienced a -54% decline from its 2011 top, that is a remarkably small discount when compared to historical discounts of -15% to -20%. Even more remarkable it the fact that after the -50% CEF correction in 2008, CEF was still selling at about a +15% premium!