Canada: First Country on the Gold Standard?

by JDH on November 5, 2011

Is Canada really on the gold standard? No, not officially, but it’s quite possible that it could happen in a de facto sort of way. Here’s the story:

The Royal Canadian Mint, owned and operated by the government of Canada, is issuing a $250 million Initial Public Offering of Exchange Traded Receipts backed by it’s gold reserves. Here’s the deal:

Most securities traded on a stock exchange give you ownership of a company. I could start a company, raise money, and buy gold with that money. If you bought shares in my company, you would own the company.

This Royal Canadian Mint ETR is different, because the purchaser owns the actual gold, rather than shares in the entity that owns the gold. ETR holders (subject to some restrictions) will apparently be able to redeem their ETRs for physical gold products produced by the Mint, like gold bars or coins, or equivalent cash.

It would appear that on the closing date of the initial offering the net proceeds will be used to buy physical gold, to be stored at the Mint. Each ETR will have an issue price of $20 Canadian, and on the closing date they will calculate how much gold backs each ETR.

So, if gold is trading at $1,750 per ounce, and if the U.S. and Canadian dollars are trading at par, and if we ignore commissions and expenses, each ETR would be worth .011 ounces of gold. Or, stated another way, you could convert 87 units into one ounce of gold.

There will be an annual service fee of 0.35 per cent that will reduce the value of the ETRs, and presumably there will be fabrication and other charges if you want to convert your ETR’s into physical gold. (If you are looking for a job, they’re hiring).

So, with those caveats, what we now have, in effect, a quasi-government currency backed 100% by physical gold. Think of the implications:

If I own a business selling something (let’s say trucks), instead of selling my trucks for dollars, I could sell them for Royal Canadian Mint Exchange Traded Receipts. These Mint ETRs, or METRs, could become a unit of currency. So instead of selling the truck for $50,000, I could sell it for 2,500 METRs.

Cool, eh?

I like the name METRs, too. In Canada we use the metric system, and our unit of measure, instead of feet and yards, is the meter, so it’s a word that already means “stable unit of measurement” for us, so it would be easy to adopt.

For investment purposes, I would no longer think in terms of dollars. I could invest my savings in METRs, and since they are traded on the TSX I can hold them in my brokerage account, or RRSP, or RESP, or TFSA, or wherever I want.

Of course there are some problems with METRs as a unit of currency.

First, the METRs are only available to Canadians, so it’s unlikely they will be adopted world-wide.

Second, the initial offering is for $250 million, which is a tiny amount, and obviously to small to serve as the basis for a currency, but it’s a start.

How do METRs compare to other physical trusts?

Of course METRs are not the first physical trusts holding precious metals. For example, the Sprott Physical Gold Trust holds nothing but physical bullion (and a small amount of cash), and you can convert your units into physical gold. In fact, in the first six months of 2011, a total of 44,000 units were redeemed for one bar of gold bullion. You can read about it in their quarterly report.

And where does Sprott store their physical bars?

At the Royal Canadian Mint!

And what management fee does Sprott charge? Page 3 of their quarterly report says it’s .35%

So what’s the difference between Sprott’s product and the METRs?

Not much, obviously. They both invest in physical metal only, stored at the Royal Canadian Mint in Ottawa, and they both charge a .35% management fee. There are three obvious differences:

First, Sprott’s funds already exist, and are widely traded.

Second, Sprott’s physical gold trust has a net asset value of over $2,156 million, which is almost nine times larger than the proposed initial value of $250 million for the METRs.

Third, in addition to gold, with Sprott you can also buy PHS.U.TO – Sprott Physical Silver Trust and get silver. The Sprott Physical Silver Trust, which I own, has a net asset value of $763 million, so even it is three times larger than the proposed METRs.

So could Sprott’s physical trusts become a unit of currency?

Perhaps, except a unit of currency is generally issued by the government. Even though Sprott’s gold and silver are stored at the government, and they charge the same expense ratios as the government, Sprott isn’t the government.

As an investor I obviously like Sprott’s track record more than I like the governments, but he’s not the government, which makes it less likely that Sprott units will become a unit of currency.

Here’s my point: I view METRs as the “thin edge of the wedge”. This is the first time a government in North America (or perhaps the world for all I know) since the end of the gold standard has issued pieces of paper that can be traded for actual gold. That, be definition, is a gold standard.

And that’s good news.

I hope that investors will buy METRs, and Sprott’s products, and other comparable products, because as they grow in popularity we inch every closer to a true gold standard.

We don’t need the government to back our dollars with gold. We just need some type of paper to be backed by gold an viola, we have a gold standard.

Thanks for reading, all comments welcome, either below or on the Buy High Sell Higher Forum, and see you next week.

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