Claymore Launches Gold Bullion Trust

With governments around the world providing a record amount of economic stimulus, many believe that gold will increase in value significantly as it has historically provided a hedge against inflation.

One problem that gold investors outside the US have is that the US dollar usually drops against other currencies when gold rises. This can offset the gain entirely frustrating some that made the right call only to see the currency loss come into play.

Claymore will hedge their position into Canadian dollars allowing investors to take full advantage of the upside on gold bullion while protecting their investment from currency fluctuations.

Another interesting feature to the offering is that a full warrant exercisable at the issue price will be available to those participating in the new issue allowing investors to magnify their gains should gold rise over the next six months.

The trust will convert to an ETF (Exchange Traded Fund) after six months in the event that the units daily weighted average trading price is a 2%  or more discount to the net asset value. 

Viewing of the preliminary prospectus can be viewed here and closing is scheduled for mid May. Your thoughts and comments are always appreciated.

Look for Value in Convertible Debt

In some of my previous posts, I discussed the value available in the Canadian preferred share and investment grade corporate bond markets. Over the last couple of months, typical preferreds have risen 20% – 25% while investment grade corporates and Tier 1 Capital Trusts have increased 10% or more.

An area to consider for some decent value right now is the convertible debenture market.  A convertible debenture of a publically traded company usually trades on the TSX so pricing is very transparent. The debentures are usually unsecured so they are based solely on the creditworthiness of the underlying company.

The debentures pay a fixed rate of interest with coupon payments being made semi-annually in most cases. Unlike trust units or commmon stock, the interest payment is fixed on the debentures which gives a level of comfort to investors as companies will do whatever it takes not to go into default.

The debentures are convertible into common shares at the investors option at a pre-determined price when issued. This provides the investor not only the interest but an opportunity for capital gains as well should the underlying share price of the company rise over the term of the debenture.

At maturity, the corporation usually does one of two things. It can pay the investors back in cash or shares. If the payment is made in shares, the price used is usually 95% of the average trading price over the 20 days prior to maturity.

Typically speaking, you dont want to be faced with this scenario as the share price will drop continuously over those 20 days. I will get into this in more detail on another post.

Currently most convertible debentures are yielding in excess of 10% with some yielding in the 20% range. The lower yielding convertibles have been able to raise capital in these markets to shore up their balance sheets reducing the risks of holding them. A company like Cominar REIT has a 2014 debenture yielding in excess of 10%. Primaris REIT has one yielding 12%. Debt laden Harvest Energy has debentures yielding in excess of 20%. The debt looks considerably more attractive than their trust units and the debt has increased in value by 30% in the last month.

Look for institutional investors to start picking away at them as the yields on other fixed income investments continue to drop and money markets with all time records amount of cash flow out to find higher yields.

Your comments are always appreciated.