With gold having successfully bucked the equity downward spiral, as well as having been in its own bull market, MarketWatch reports that “Buyers take a shine to new gold ETF:”
Strong demand for a closed-end fund that holds gold bullion suggests that some affluent investors are willing to pay an expensive insurance premium for the ability to take possession of the precious metal.
Sprott Physical Gold Trust (PHYS) has already made waves in the gold market. It has more than $700 million in assets after a recent secondary offering following the initial public offering in February.
Sprott Physical Gold Trust is listed on both the NYSE Arca and the Toronto Stock Exchange. Aside from its closed-end format, it has key differences from gold ETFs such as the $50 billion SPDR Gold Shares (GLD).
Most notably, the Sprott offering has a unique feature that allows investors to redeem shares for gold bullion on a monthly basis, provided the amount is enough to cover at least one so-called London Good Delivery Bar, which generally weighs around 400 troy ounces.
Each share represents 1/100th of a troy ounce. Expenses are capped at 0.65% of the trust’s assets.
Since the number of shares can only be increased with secondary offerings, this “call option” on physical delivery of gold drives the price of the trust’s shares above spot gold prices, said Nicholas Colas, ConvergEx Group chief market strategist, in a research note.
He estimated that since inception, the fund’s median premium to net asset value has been between 7% and 8%. The escalating debt crisis in Europe pushed the premium over 20% in May. Late last week, the premium was just above 10% following the secondary offering.
Most ETFs are structured as open-end funds and have an arbitrage feature that generally keeps the price of a share in line with net asset value. Premiums and discounts are normally much smaller.
The hefty premium in Sprott Physical Gold Trust shares has drawn attention.
“The premium shows enough people are interested in the call option on gold to pay up for it,” Colas said in an interview. “The market appears to be telling us something about how investors view gold as an investment. It is trading at a premium even when there are other established ETFs for gold.”
The trust is managed by Sprott Asset Management LP of Toronto. Its gold bullion is stored at the Royal Canadian Mint.
Eric Sprott, chief executive of Sprott Asset Management, said in an interview that part of the trust’s appeal is that investors don’t deal with a counterparty that may be a leveraged financial institution. He said physical gold is priced higher than commodity exchange quotes, which he derided as a “paper market” because there is little physical settlement of gold.
He also pointed to potential tax advantages for some U.S. investors relative to other gold ETFs. For investors who hold Sprott Physical Gold Trust shares for more than one year, gains are taxable as long-term capital gains at a maximum rate of 15%, according to the prospectus.
Meanwhile, long-term gains in SPDR Gold Shares are taxed at a higher 28% rate for “collectibles.”
What if you decide to take possession of the gold? Wealthy investors or institutional buyers with a large enough position to redeem shares for gold must inform the trust by the 15th of the month, according to the prospectus. Shareholders can have the bullion delivered via armored vehicle, although they have to shoulder the costs. The prospectus estimates it costs $5 per troy ounce for delivery to the continental U.S. and Canada, plus $5 per bar for in-and-out fees charged by the Royal Canadian Mint, and an administrative fee of $50.
If you are planning on taking physical delivery of gold, don’t mind the premium and are looking for better taxation, then PHYS might make sense. Otherwise, if you’re just an investor trying to ride the trend of gold, you’re probably better served investing in the GLD ETF.
Disclosure: We have holdings in GLD but not PHYS