05 November 2014

NAV Premiums of Certain Precious Metals Trusts and Funds

Some are asking why there is a such a deep discount to net value on the Central Funds.  I think the answer is fairly simple and I think I have explained this before.

There is no coincidence that there is a reasonably simple redemption facility in the Sprott Funds, and there is none in the Central Funds.

If one wishes to 'unlock the premium or discount' in Sprott all they have to do is to take delivery of some bullion.

How does one unlock the value in the Central Funds in the short term if the discount gets 'out of bounds' with historical norms?

The answer is that one does not.  The only way to unlock the NAV is if the unit values rise and one sells the units.  It works in a time of rising prices, but lacks 'teeth' in a period of falling metal prices.   

Otherwise that value is only theoretically unlocked upon the funds liquidation, and distribution of assets to unit holders.  They pay no dividend, and there is no redemption facility. 

And this makes them a very safe short, and a somewhat problematic safe haven. And so when the metals are under pressure, they can be under quite a bit of pressure through market gamesmanship.

Do people short the Central Funds by borrowing sufficient shares and reporting them?  Is naked shorting forbidden? 

Are there any practicable rules for the well connected anymore?

Yes there are hedges that one can engage in to try and bet on a reversion to the norm for the Central Funds.  But this is obviously not so efficient is it?

It is easy to make theoretical arguments and to discuss pros and cons.  And to refute them, one points to the relative performance of the Sprott funds and the Central funds in the market and says, QED.

I am not saying that the Central Funds are 'bad.'  I have purchased them any number of times, especially when some event like a share offering provokes a deep discount temporarily. 

But what I am saying is that in a period of protracted weakness, they tend to underperform, unless one thing precious metal markets are bottoming AND one has a longer term time horizon.

But at that point, one also looks to higher beta products in addition, such as miners or royalty streams.

I am merely trying to explain the phenomena, not trying to make a case for anything one way or the other.   An investment that is not fraudulent is neither good nor bad, except in terms of some function it is designed to serve in a portfolio.  It is like arguing whether a screwdriver or a hammer are inherently good or bad.

There is a redemption risk in Sprott that is not applicable to the Central Funds for example.  If someone the paper price of gold became ridiculously out of bounds relative to physical supply, it is a likelihood that there would be a redemption run on Sprott as compared to the Central Funds. 

But that seems a bit of a reach, and the market seems to indicate its agreement for now. And at that extreme point the miners with reserves would be soaring so greatly that I doubt many traders would care to waste time debating it.