Exchange traded receipts are a novel way for investors to invest in gold bullion

Royal Canadian Mint Gold Reserves are Exchange Traded Receipts (ETRs), symbol MNT on the Toronto exchange, issued by the Royal Canadian Mint (the Crown Corporation responsible for minting and distributing Canada’s circulation coins) that let investors own gold bullion stored in the Mint’s vaults.

The value of these exchange traded receipts vary with the price of gold. Investors can trade their exchange traded receipts on the stock exchange, or once a month they can redeem them for gold coins or bullion with a minimum purity of 99.99%. This requires at least 10,000 exchange traded receipts plus redemption and fabrication fees for the gold coins or bars.

Instead of physical gold, investors can choose to redeem their units for cash equal to 95% of the lesser of: a) the ETR price on the redemption date; or b) the volume-weighted average price of the exchange traded receipts for five trading days prior to and including the redemption date.

Unlike stocks, commodity investments such as gold bullion do not generate income. Instead, they come with a continuing cash drain for management, insurance and so on. The Mint charges an annual service fee of 0.35%.

In general, we advise against buying gold bullion, gold coins (unless you collect them as a hobby) or certificates representing an interest in bullion. We feel you are better off investing in the shares of well-established companies and in real estate, which can generate income. If you want to invest in gold, we advise doing so mainly through the gold mining stocks.

However, if you do want to hold bullion, Royal Canadian Mint Gold Reserves’ exchange traded receipts are a relatively low-cost and liquid way to do it.

TSI Network recommends a conservative approach to gold investing

Conservative investors should be very careful when choosing gold investments. Gold tends to have a particularly strong grip on some investors’ imaginations, so they tend to bid up gold-stock prices out of proportion to how much profit these companies can make from gold mining.

Buying gold as an investment: seven guidelines we use to pick gold-mining stocks

1. To profit in gold stocks, look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
2. High-quality gold stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
3. Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.
4. We think you should avoid stocks that trade “over the counter,” where such things as regulatory reporting are lax.
5. We also recommend avoiding stocks that are trading at unsustainably high prices as a result of broker hype or investor mania.
6. Compare the market caps of the stocks with the estimated value of their assets or future earnings streams. Some need to quickly find a mineral deposit and begin production to justify the current share price and avoid collapse.

Above all, you should automatically rule out investing in companies that promote themselves too aggressively, or do so misleadingly. Success is more likely if the managers focus on finding or developing a mine, rather than touting their stock.

Do exchange traded receipts have a place in your portfolio? Has it been profitable experience? Share your thoughts with us in the comments.