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Is a Royal Canadian Mint ETR a Good Investment?

There is a lot more to precious metals collecting, and especially investing than meets the eye. In fact, there are so many ways to expose yourself to, for instance gold, that you might honestly ask whether most of them are just nonsense? In other articles, we talked about how some gold derivatives are both ugly and dangerous.

Does that mean that investing in bullion is the only way to go? Depending on your goals, i.e. investing in the long-term vs. trading for the short-term, that is probably not true. And in that spirit, we wanted to investigate the Royal Canadian Mint ETR (short for Exchange Traded Receipt).

First principles: what makes a Royal Canadian Mint ETF interesting?

So why is investing in gold, without actually owning the physical metal popular? Some reasons include that you can don't have to physically buy or sell it. You just click a button on a screen and your account is instantly credited or debited! Moreover, it can be pretty cheap. The iShares Gold Trust charges just 0.25% per annum to run the whole thing. That's just $2.50 for every $1000 you own. On the other hand, the classic complaint is that most of the "alternative" ways to own gold defeat the purpose of gold as a hedge to general market chaos. The idea there is that you want something tangible when "economic shit hits the fan". People have also argued that electronically traded funds (ETFs) over-represent the total amount of gold in existence.

Of the many gold ETFs is the Royal Canadian Mint ETR program. Introduced on the Toronto Stock Exchange (TSX) under the ticker symbol MNT, the Mint's receipts allow investors to buy pro-rated ownership in gold. The stock you own equals a certain amount of physical gold purchased from the Mint. From the Mint's FAQ, “the gold bullion will be beneficially owned by the ETR holders and not by the Mint.”

You can find the Royal Canadian Mint ETR's 2011 prospectus on their website here. When the offering first came to market, the spot price for each receipt was roughly CAD $20. Its net asset value, and consequently price, declined to around CAD $13.70 towards the end of 2013, and by early 2018, recovered to nearly CAD $17.50. Beyond its government backing, the Mint obliges itself to hold onto the gold purchased by investors in their facility.Simply put,  “the Mint will act as custodian of the gold bullion on behalf of the ETR Holders and will hold the gold in its facilities in Ottawa.” To address some concerns, it argues that the Mint's gold reserves exceeds the amount invested in.

Upsides of Royal Canadian Mint ETR Investments

1. Direct Ownership

Unlike many gold-based investments such as derivatives, and even many trusts, the Royal Canadian Mint ETR represents "direct beneficial ownership" of bullion held at the Mint. You can trade this ownership in both CAD (TSX: MNT) and USD (TSX: MNT.U).

2. Competitive Purchase Price

For those looking to make incremental investments in the gold bullion market, the Royal Canadian Mint ETR can be a great way to start. You own 99.9%+ fine gold and only pay a fee of 0.35% per annum to do so. You can sell this anytime for cash or in theory - I explain why "in theory" below - redeem it for gold bullion.

3. Safe Storage

Should you begin buying receipts, you don't have to worry about paying for vaulting or insurance. The Mint's security is backed by the Canadian government and monitored by state-of-the art technology. Some private facilities can run storage fees so high that you could add gold bars with your savings.

Downsides to Royal Canadian Mint ETR Investments

Despite some promising upsides, there exist some serious and chronic flaws to investing in the Mint's ETRs. Let's go ahead and look more closely at these:

Is the Gold You Own Mixed Up in the Mint's Operations?

The gold represented by a Royal Canadian Mint ETR comes from the excess of gold stored in the Mint’s refinery and production operations. How is this an issue? Simply put, this is an issue because you are exposing yourself to owning whatever quality of gold is in the Mint’s possession at the time you want to cash out. To be fair, it is an unlikely situation but in a worst-case scenario, you are that much further removed from your assets.

The Vaulting System is Flawed.

The Mint presents their vaulting system as the best possible gold storage solution: cheap and secure. Is it really so?  Is storing your gold with the Mint the best way to save your money? Unlike private storage, you can't just go in and access your product. In fact, you are stuck holding it in a Canadian government vault rather than having the freedom to move it around. Arguably, you are not really vaulting metal that you own. Instead, the gold you are supposed to own is being vaulted among the Mint's.

Redemption only with 10,000 ETR units makes them a tough sell.

Ever want to redeem a Royal Canadian Mint ETR? Well, you need to have a look through two documents. First, there is a comprehensive guide on how to redeem a Royal Canadian Mint ETR. Second, there is the paperwork to redeem a Royal Canadian Mint ETR. But here's the catch, you need a minimum of 10,000 Royal Canadian Mint ETR units to redeem your ETR for metal. But it doesn't stop there. The Mint has a plethora of fees: CAD $100 per request to redeem, and a whopping 5% of the gold price on the redemption date for gold maple leaf coins. If you take out as 1 kg gold bars, you get a better deals of only USD $15 per kilogram... much more than you would pay buying a 1 kg bar from day 1.

Only in the alternative, if you want something cost-effective, can you get LBMA good-delivery gold bars for $1.00 per troy ounce over spot (up to 10,000 ounce when it moves to $0.25 per troy ounce). Other "cheaper" options include a facilitated sale at 0.13% plus applicable taxes. Also, there is a minimum fee of $5,000 meaning you would need to withdraw. So effectively you need to withdraw 3.85M to get that rate. Oh and if that's not enough, the Mint can change these rules anytime if they give you a 90-day notice.

So if you are wondering why would the Mint cannibalize its own bullion sales? Well, it is a lot more profitable to sell paper that represents gold than actual gold.

The bottom line on the Royal Canadian Mint ETR

So with ETRs, should you assume paper receipts are as secure as owning your own gold? Logic suggests that this is not the case. Effectively, most investors buying precious metals are doing it for precisely the reason that they do not want to own "paper." Is the solution necessarily to buy Royal Canadian Mint bullion? Perhaps for some investors. Other bullion buyers might prefer lower-premium products, such as those produced by Republic Metals out of the USA.

For those interested in more direct speculation, however, there also exist an array of ETFs to choose from. For example, a share in the iShares Gold Trust which does much the same thing as a Royal Canadian Mint ETR while charging - at the time of writing - roughly 10 basis points less, per annum. Having dabbled in some of these, they come with their own risks and rewards.  So if you take one thing home it's this. Whether or not your plans are short- or long-term investment, all else being equal, lower premiums and fees should be top of mind.

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