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.
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."
Other ETFs that hold gold bullion include iShares Comex Gold Trust (CONSOLIDATED:IAU) and ETFs Physical Swiss Gold Shares (CONSOLIDATED:SGOL) .
For complex tax issues, investors are always best served by consulting a tax adviser. 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. Said Sprott: "We'll deliver anywhere Brink's does".
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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