Forwarded from Bob Hettinga's lists. JMR
Thom Calandra's StockWatch http://cbs.marketwatch.com/news/story.asp?column=Thom+Calandra's+StockWatch&dist=nwtwatch&siteid=mktw
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AS GOLD BRIGHTENS, 'PAPER' VERSION LAGS
SAN FRANCISCO (CBS.MW) -- Gold is gaining favor among Wall Street's analysts, brightening prospects for a new round of paper-gold securities.
Yet even as banks such as UBS declare this week that the metal is in a "new secular bull market," the most anticipated of the new paper-gold funds, one that was anointed for the New York Stock Exchange, appears to be behind schedule.
Equity Gold Trust, sponsored by the World Gold Council, filed an initial S-1 registration with the Securities and Exchange Commission in mid-May. Hopes were high that the proposed exchange-traded fund would launch on the NYSE this summer. See: Proposed fund will spark investment demand. http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtwatch&guid=%7BAB923689%2D6B45%2D4A7A%2DBFA9%2D935DFF2000CA%7D
Now there are signs the new fund, caught in a hornet's nest of regulatory issues, may miss the summer entirely. Bankers and others familiar with the situation say the gold industry group that is backing the idea is grappling with concerns about the custody of stored gold, as well as the fund's tax status.
That's a pity, given the growing acceptance of gold as an investment choice.
As recently as Thursday, chief technical analyst Peter Lee and his team at UBS declared the precious metal was "within the consolidation phase of a new secular bull market." The UBS technicians, joining several other major investment banks in their growing enthusiasm for the metal, said, "it looks as if a breakout above $375 an ounce is the key to unleashing another bull run from the metal. If such a breakout should occur, we would be looking for targets first toward the $425 zone, then closer to $500."
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The chances of accelerated inflation and a continued decline in the dollar have banks such as Merrill Lynch and Goldman Sachs starting to recommend 5 percent weightings of gold in clients' holdings. The spot gold price of $355 an ounce on Friday was about $35 below its February high point this year, yet shares of large gold producers such as Newmont Mining (NEM) and small exploration companies such as Ivanhoe Mines (IVN) and Nevsun Resources (NSU) are flirting with multi-year or all-time highs.
Gold's growing luster has prompted several organizations to enter what Wall Street pros call the "securitized commodities" arena. One firm, sponsored by the World Gold Council, launched an exchange-traded gold fund in Australia this past spring. Each share of that fund, Gold Bullion Ltd. (GOLD), gives investors a tenth-of-an-ounce of gold. See: New gold instruments on the prowl. http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtwatch&guid=%7B101E7A7C%2D05D3%2D4B66%2D80FE%2DC2BF18A7AA0D%7D
Another new fund, the closed-end Central Gold-Trust (GTUUN), recently began trading in Canada and is managed by the same folks who successfully brought another bullion fund, the 20-year-old Central Fund of Canada (CEF), to the American Stock Exchange.
Few bullion professionals want to speak publicly about the World Gold Council's regulatory difficulties for its Equity Gold Trust. That's mostly because the gold council spends tens of millions of dollars each year marketing the metal, and industry types are giving the trade group's new leadership, Chairman Christopher Thompson of Gold Fields Ltd. (GFI) and former Calpers pension-fund chief James Burton, a honeymoon period.
But boy, are the natives restless. "This baby has had a pregnancy longer than an elephant's," one noted metals analyst told me. "The deal-wobbler, if not breaker, is the facility to pick up physical gold."
Indeed, nowhere in its 200-page SEC filing does Equity Gold Trust explain precisely how British bank HSBC, its proposed trustee, would go about shuttling allocated gold from an investor to a London vault. The trust would allow institutions to contribute gold to the fund in its purchase of large ownership units.
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A longtime financier and gold dealer told me, "Central Gold-Trust and Central Fund both know where the gold is. They have warehouse receipts, audit reports, their gold is insured, and they don't allow sub-custodians access to actual gold or accept gold from sub-custodians."
The gold council and the SEC routinely decline to comment on any filings, pending or otherwise. But one banker tells me, "The SEC is looking out for the fund's buyers, and therefore the SEC wants to make sure that the assets are intact. The WGC's fund did not provide enough controls to assure the SEC."
Like the Australia fund, the proposed Equity Gold Trust would buy gold bullion and issue shares representing gold holdings. Each share then would be backed by that amount of gold and deposited with HSBC in London.
Another hurdle may be the mention of a so-called intellectual property lawsuit mentioned in the original filing. Equity Gold Trust's first choice to be its proposed fund's trustee raised the possibility that it considered the gold ETF concept its own idea, according to the filing. That choice was unnamed in the filing, but several bankers speculate it is Bank of New York, a company that's eager to claim the area of securitized commodities as its home turf.
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Morningstar, the mutual fund research firm, may have given the proposed Equity Gold Trust (GLD) the kiss of death in a report that panned its prospects. In that report, Morningstar noted "the trust is contending with another business entity that claims to have intellectual property essential to the trust's operations. The legal language pertaining to the problem is murky, and no litigation has been initiated so far, but the trust could experience additional costs or delays in operations."
Another challenge is tax status. The Internal Revenue Service may be reluctant to regard the open-end fund as a security. Thus, even if held more than a year, shares of the trust would represent a "collectible" in the eyes of the IRS and thus be subject to a 28 percent income tax levied on institutions and individuals.
J.C. Stefan Spicer, the chief executive of Central Gold-Trust and Central Fund, tells me the mark-to-market provisions may also be problematic. An owner of Equity Gold Trust shares likely would see the holding's net asset value adjusted periodically, say daily, weekly, quarterly or yearly, in a mark-to-market reckoning that would create tax consequences.
Oh, and equity mutual funds that are generally restricted from stuffing more than 5 percent of their portfolio with actual bullion might find themselves exceeding regulatory limits when gold prices do head far higher, as I expect they will this year.
"Look, they put out a product idea that was too preliminary," Spicer told me in a break from auditing his two fund's bullion holdings in a Toronto-area vault operated by Canadian Imperial Bank of Commerce. "They wanted to launch something never launched before done in the United States. Australia may have worked but the United States is much more regulatory."
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Spicer's father, Philip Spicer, first introduced the idea of a closed-end bullion fund in the early 1960s. Closed-end funds trade at premiums or discounts to their net asset value. Spicer explains that his two bullion funds go to great lengths to segregate, store and insure their holdings.
"Our bullion is stored in separate cages, with the name of the owner printed on the cage, and on top of each pallet of bullion it states Central Fund or Central Gold-Trust," Spicer said. "This disables the bank from using the asset from any of their purposes. We also pay Lloyds of London for coverage of any possible loss."
The fee structure of the proposed Equity Gold Trust also may be a hindrance if the fund were to begin trading on the NYSE, said Spicer, who acknowledges his two funds are competitors. That's because the amount of gold that each Equity Gold Trust share represents decreases over time as the trustee is paid for managing the product.
In contrast, Central Gold-Trust, which holds only gold, and Central Fund of Canada, which holds gold and silver, "do not discount or dilute the existing owner's asset value by issuing new shares," Spicer said from his Ontario office.
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"Non-dilution is the most important issue, and if you are bringing in new users, and their net asset value is one dollar, at the end of the day they should still have that one dollar," he said.
In recent weeks, investors have begun to warm to the idea of owning gold through Spicer's two funds. The premiums the two funds sell for have increased markedly, even with a middling gold price. As of Friday morning, the premium on Central Gold-Trust, which holds 87,000 ounces of gold, was about 13.5 percent to the actual price of spot gold. The premium on Central Fund, which holds 297,000 ounces of gold and almost 15 million silver ounces, is 15 percent.
For more on the paper gold story, see subscription service The Calandra Report. (http://cbs.marketwatch.com/commerce/theCalandraReport.asp?siteid=mktw&dist=hfdtab&pname=tcr) _______________________________________________________________________
THE MINING BEAT
Shares of little-known gold exploration companies, and some that are very well known, are leading the general stock market as investors turn their attention to hard assets.
Robert Friedland's Mongolia-based gold and copper operation, Ivanhoe Mines, was leading most exploration stocks this week and now exceeds the $1 billion Canadian market-cap level. Friedland, as detailed at length in The Calandra Report (http://cbs.marketwatch.com/commerce/theCalandraReport.asp?siteid=mktw&dist=hfdtab&pname=tcr) in June and July, has been convincing fund managers to use Ivanhoe Mines as a proxy for China-area economic growth. "Robert was the rock star at the Diggers and Dealers Convention in Australia, which had a number of large institutions present," Ivanhoe Mines deputy chairman Ed Flood told me from his Vancouver office.
In addition, shares of Venezuela miner Crystallex International (KRY) are holding their sharp gains of the past week. Crystallex is identified in The Calandra Report (http://cbs.marketwatch.com/commerce/theCalandraReport.asp?siteid=mktw&dist=hfdtab&pname=tcr) as a likely takeover target, given the size of the Venezuela deposit, 10-million-ounce Las Cristinas, it hopes to develop.
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Robert Bishop, the longtime editor of Gold Mining Stock Report (http://www.goldminingstockreport.com/), predicts a Crystallex takeover. "My view," he said, "continues to be that there are multiple parties conducting advanced due diligence and that waiting until a feasibility study is in hand next month, not to mention running the risk of higher gold prices, would only mean that an interested party would get to pay more for Crystallex. In short, I'd be surprised if we don't see movement on KRY this month."
Finally, shares of Bema Gold are rising swiftly (up 8 percent Friday morning) as investors lick their chops in anticipation another round of drill results from the Canadian company's Russia project, Kupol. Bema (BGO) may find itself with one of the world's most lucrative gold projects, along with explorers Crystallex, Nevsun and Ivanhoe Mines, if the company next week can provide more confirmation of extremely high grades at the far eastern Russia field it controls. Some bankers see Bema's shares doubling in short order if the test results exceed 30 grams of gold per each ton of ore. See: Bema update http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtwatch&guid=%7BDF9A4B32%2D55BF%2D48BA%2D95CB%2DE7909A506D5F%7D .. _______________________________________________________________________
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