Many of the investment vehicles available to Canadians interested in precious metals bullion have extraneous risk factors that separate performance from the underlying performance of bullion itself, according to a recent study.

The Catalyst Equity Research study identified the various investment options available and ranked them in order of purity of investment, with those closest to a pure bullion investment at the top.

Topping the list of investments most closely linked to bullion performance was the BMG BullionFund. Other investment options include Central GoldTrust, Central Fund of Canada, Claymore Gold Bullion Trust and Precious Metals Bullion Trust, although liquidity may be somewhat limited and investors may incur significant premiums and discounts which could impact expected returns.

“BMG BullionFund is an open-ended mutual fund trust that, in our opinion, minimizes most of the extraneous factors that should be taken into consideration when investing in bullion,” says Robin Cornwell, president of Catalyst. “Historically, investors have tended not to regard investing directly in bullion as part of their investment strategy. However, numerous alternative product introductions have made it easier for investors to add bullion to their investment strategies.”

Research conducted over the past year led Catalyst to its findings.

“Bullion investing has never been so accessible,” added Cornwell. “Numerous choices are out there for the educated investor, however as good as these choices are, we found that the majority of investments involve factors that skew the actual underlying performance of the bullion itself beyond the control of the investor.”

The study notes that many of the new alternative products are merely “proxies” of bullion and involve risk, given that not all investments track bullion precisely. As well, liquidity is a major consideration for large investors

The study divides bullion investing into two categoreies: “Near Physical Bullion” and “Pseudo Bullion”. Near Physical bullion investments are few and far between, it says, while “Pseudo-Bullion investments are in some way either managed, have liquidity issues or involve various other risks including counterparty risk factors.”

The study notes that exchange traded funds are a popular choice with generally good liquidity. However it says ETFs may be better suited to active traders as it is intended to track the price of bullion, rather than invest in bullion.

Catalyst concluded that most bullion investments are derivative in nature, have limited liquidity, or are in some way managed for performance. Short of owning physical bullion, Catalyst recommends BMG BullionFund.

IE