NAV Premium of Certain Precious Metal Trust and Funds - 91,680 Ounces of Gold Out of Sprott

The premiums on PHYS and PSLV are back more to 'normal' levels now, although still hardly exuberant.  PSLV is at a slight premium, and PHYS is almost flat.

The deeper discounts on CEF and GTU are still there, but a bit thinner that they have been.

Since the last time I put out this chart, another 91,680 ounces of gold bullion have been redeemed from the Sprott Physical Gold Trust.

I can imagine someone rationalizing this redemption as an arbitrage deal because PHYS is selling at a slight discount to its NAV. However, given the 'friction' of the transaction, and the necessity of storing this amount of gold, it seems like a fairly small amount to be tempting for a mere arbitrage against the NAV discount, given the volumes of gold that are being taken out.

Although it is possible that PHYS has priced its redemption process too cheaply.  And there is no allowing for the desperation of a hedge fund that is willing to scrape for thin returns. This assumes they are not taking delivery to ship the gold to Asia for the premiums for physical paid there. If so, then it is not really arbitrage as I am using the term with regard to the discount to NAV, but the discount of paper to bullion.  And that is a general trend that is hard to miss.  But some do.

But one would think that playing the spread with paper and leverage, and betting that there would be a reversion to norms if the premiums fall to historically low discounts, would be a smoother and more scalable wager for any fund truly interested in paper profits. Here is a link to the distribution of PHYS premiums historically.

But this seems to be viewing a phenomenon in isolation that I think it is more correctly seen as part of a general trend, that one is foolish to ignore.

As I have shown here repeatedly, there is a general scouring of enormous proportions of the physical gold bullion from most if not all of the Western trusts and funds at these prices as set by the Comex, which unfortunately is still a price maker for the physical trade despite its own shrinking physical basis.  That is the inconvenient reality that gold imposes on the financiers:  they cannot print it into existence, except as an apparition of paper, without genuine substance.

And there are none so blind as those whose paychecks depend on their willing ignorance.  It is unfortunate, but a fact of life.

So, let's see where this grand experiment goes. I have not been keeping an eye on the short interest in the PHYS, but I think the greater problem is the price of gold overall, which does not seem to be a market clearing price in terms of the actual commodity.   And as a result, the physical bullion is flowing towards markets paying fairer prices, and finding ownership in stronger hands.

But why argue about it, especially with those whose mindset is clearly fixed in one direction? Let the tide go out, and we will see what allocated and unallocated funds are naked.   And who, at the end of the day, is actually holding what gold, and with what encumbrances, cross claims, and counterparty risks.  

So in summary, some might say that gold is flowing out of Sprott because of its discount to NAV, which I point out is miniscule, and much more adeptly gamed through the usual paper games.

Rather, gold is flowing from financialised markets to cash basis markets, from highly leveraged schemes to the vaults of stronger hands flush with paper of less confident value, and put even more simply, from West to East.

This is what happens when once again we begin to see 'peak paper.'  Yes it certainly has not failed yet, and yes, the official measures may show little devaluation from inflation and mask the enormous leverage and undisclosed counterparty risk that is still in the system, après Crash.

 And to this I say, 'in time.' 

Not everyone is investing with a two month time horizon, as is de rigueur in the City and on the Wall Street these days, and passing around their hot potatoes of dodgy paper from hand to hand as quickly as possible, before the next bell rings.

Sprott Physical Gold Trust *PHYS* Prices At 14.84 - PHYS YTD Performance

This offering will raise between $341,000,000 and $392,000,000 for additional purchases of gold bullion, taking it off the world market.  The final number depends on the actions of the underwriters with regard to their own allotment of 3,450,000 units at roughly 14.84.

The total raised would represent roughly 240,000 ounces of gold at $1740 per ounce.

Sprott Physical Gold Trust Prices Follow-on Offering of Trust Units In An Aggregate Amount of US$341,320,000

Sep 7, 2012

TORONTO, Sept. 7, 2012 /CNW/ - Sprott Physical Gold Trust (the "Trust") (NYSE: PHYS / TSX: PHY.U), a trust created to invest and hold substantially all of its assets in physical gold bullion and managed by Sprott Asset Management LP, announced today that it has priced its follow-on offering of 23,000,000 transferable, redeemable units of the Trust ("Units") at a price of US$14.84 per unit (the "Offering").

As part of the Offering, the Trust has granted the underwriters an over-allotment option to purchase up to 3,450,000 additional Units. The gross proceeds from the Offering will be US$341,320,000 (US$392,518,000 if the underwriters exercise in full the over-allotment option).

The Trust will use the net proceeds of the Offering to acquire physical gold bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering...

Year-To-Date Comparison of the performance of gold and PHYS.

Year-To-Date Comparison of the performance of GTU and PHYS

Sprott Physical Gold Trust Announces Follow-On Offering

The stock was down .31 after hours on this announcement. So much for the healthy premium.

Even though the funds will be used to purchase additional gold bullion and add a little cushion to the cash on hand, there is generally some game playing done by the underwriters who like to hedge (some might say 'front run') their over allotments.

PRESS RELEASE: Sprott Physical Gold Trust Announces Follow-on Offering of Trust Units
Thu Sep 06 16:04:24 2012 EDT

TORONTO, ONTARIO--(Marketwire - Sept. 6, 2012) - Sprott Physical Gold Trust (the "Trust") (NYSE:PHYS)(TSX:PHY.U), a trust created to invest and hold substantially all of its assets in physical gold bullion and managed by Sprott Asset Management LP, announced today that it has launched a follow-on offering (the "Offering") of transferable, redeemable units of the Trust ("Units").

The Trust will use the net proceeds of the Offering to acquire physical gold bullion in accordance with the Trust's objective and subject to the Trust's investment and operating restrictions described in the prospectus related to the Offering. Under the trust agreement governing the Trust, the net proceeds of the Offering per unit must be not less than 100% of the most recently calculated net asset value per Unit of the Trust prior to, or upon determination of, pricing of the Offering.

The Units are listed on NYSE Arca and the Toronto Stock Exchange under the symbols "PHYS" and "PHY.U", respectively. The Offering will be made simultaneously in the United States and Canada by underwriters led by Morgan Stanley and RBC Capital Markets in the United States and RBC Capital Markets and Morgan Stanley in Canada...

Net Asset Value of Certain Precious Metal Trusts and Funds - Sprott Follow On a Drag on PHYS

Gold and Silver are at heavy resistance, and on the verge of breaking out. More on this in the gold and silver commentary this evening.

The Sprott Physical Gold Trust continues to underperform a bit on premium because the market is still digesting its follow on offering at $14. The numbers have been updated to include the details on shares and ounces of gold release thus far.

Although priced at $14.00, the fund paid a commission to the underwriters amounting to about $10.6 million, or about .56 per new unit offered, roughly 4 percent. So the effective revenue to the fund is about $13.44. I assume this is the price that the underwriters, Morgan Stanley and RBC Capital Markets, will pay for any over allotments which they take.

"The Trust has granted the underwriters an option to purchase up to an additional 2,850,000 trust units at the public offering price, less underwriting commissions, within 30 days of the date of this prospectus supplement, to cover any over-allotments."

A Big Money Playah Hammered PHYS Into the Close

What up?

Net Asset Value of Certain Precious Metal Funds and Trusts: Comments on CEF

Management does makes a difference.



The Central Fund's offering led by CIBC is allowing the underwriters and others given access to this offering to obtain a windfall, being given the right to purchase additional shares at 14.85.

Presumably this will create a weight holding down the premium to NAV of this fund until they have taken their profits by selling those units which they have obtained at discount prices. Perhaps this is not the case, and the news is misleading. But it would certainly explain the contraction in the premium when gold and silver are hitting new highs.

This looks to me like the habit of using an old, familiar method of obtaining funds that may be more suited to other times and different markets. Old habits die hard, and sometimes even harder when new competition enters the markets and changes are not made with the times.

Since CEF will be in the market buying gold and silver bullion, it drives up prices at the very time it is giving its bank underwriters a discount price on their stock.

Yes I understand the difficulty of selling a large tranche like that in the marketplace. But I would contrast this approach with that of PHYS and Sprott Asset Management, which managed to sell an equally large amount of units and buy bullion while continually providing the benefits to shareholders, and not to the banks with whom they are doing business.

To say I am not impressed by the CEF management would be about right. While I do not doubt they have the bullion they represent, I am disappointed by their method of obtaining the greatest value and consideration for shareholders.



I will flip their shares for a trade, but if I want to buy and hold something besides bullion when the metals are running I think there are better ways to play that trade. Some of the miners have higher beta and a better index to the metal moves. PHYS had been a great play but its premium now is a bit prohibitive for my taste. SLW is da bomb when silver runs but it too can get ahead of itself.

Still, you have to have something to hang onto when gold and silver are on a run like this. There is a huge surge of bullion and coin purchases in Europe because of worries about their currencies. When the currency concerns eventually spread to the dollar, which they almost certainly will, the buying will make what we are seeing now seem like a bump on the charts.

Eric Sprott on the Economy, the Markets, and the PHYS Gold Trust

Net Asset Value of Certain Precious Metal Funds and Trusts

The Sprott Physical Gold Trust continues to add bullion, and is now almost on a par with the Central Gold Trust, which is several years old.

Sprott Has Purchased About 9 Tonnes of Gold Bullion This Week

The Sprott Physical Bullion Trust (PHYS) is now holding 286,870 ounces of gold, with a market value of $327,003,510. The estimated net proceeds of their IPO are approximately $390,000,000, possibly higher depending on total fees for the IPO and initial bullion purchases.

They have now purchased 8.923 tonnes of gold bullion since last Friday (at 32,150.746 Troy ounces per metric tonne).

The total units outstanding are 40,000,000 for a Net Asset Value of 9.50 including cash and bullion. With the price of the Trust closing at 9.96 today, it is at about 4.85% premium according to their website.

By way of comparison, the Central Gold Trust (GTU) closed at a premium of 8.2%. This is on the high side, reflecting gold's recent run higher, and a flight to safety over recent concerns regarding sovereign debt. Gold has reached record prices in the euro and the British pound.

It will be interesting if we can see identify the drawdowns in the inventories that sourced this gold, wherever they may be. There are those who contend that the supply is coming from the unallocated inventories of bullion banks who are engaging in a kind of 'fractional reserve' gold selling to their customers.
If Your Gold Is at an LBMA Bank, You May Be Just an Unsecured Creditor by Adrian Douglas.

Let's see if the price of spot holds its levels after this unusual level of bullion purchasing in what is reputed to be a tight market.

Is the Sprott Physical Gold Trust in the Market Trying to Buy 10 Tonnes of Gold?

Something is powering the spot price of gold higher the past few days. Are the Chinese or some other entity claiming the 191.3 tonnes of IMF gold again?

Perhaps relatedly, Sprott Asset Management is involved with a new physical gold bullion trust now trading in the States with the ticker symbol "PHYS."

The IPO for the fund was last Friday 26 February, with a reported 40 million shares outstanding at 10$Cndn. There is no hard news yet on how much of the IPO was held by underwriters. In fact, most of the news on it is a bit dated.

Here is their website for the Sprott Physical Gold Trust, and the link to their NAV financials. Here is a link to the prospectus. This is a link to the stocks' *indicative value* which appears to be its NAV which they use in their premium calculation from their website.

As you can see, there is still some key information missing. The cash assets less expenses of the trust are not yet listed. I have not seen a detailed release on the results of the IPO yet. And more importantly, the trust lists only 13,686 ounces of gold owned, with a market value of approximately US$15 million.

According to the prospectus, the fund will store its gold in Canada, is established in Ontario and is under that jurisdiction, but will be calculating its NAV in US$. It appears to be a trust where price tracks their NAV, and not an ETF which tracks the price of some external instrument like an stock index or spot commodity prices.

The implication is that they will not be selling and buying bullion in relation to market fluctuations as actively as an ETF pegged to spot for example. So the examination of premiums and discounts to NAV will be an issue.

If the trust has sold all its units listed as outstanding, they are in a cash position of approximately $390 million. Are the underwriters still holding any of this inventory? Their prospectus commits them to holding 97% of their assets in gold bars. No certificates or derivatives. And they are only listing $15 million in current gold assets.

Nine out of ten Americans might notice that the Sprott trust needs to buy about 10 tonnes of gold, the size of most small central bank purchases, if they have not negotiated and secured delivery already. According to the Prospectus, the trust does not traffic in paper certificates and derivatives, but in good bullion only.

I am more familiar with trusts and funds taking an incremental approach in their bullion purchases, and the negotiation for delivery before the units are sold. I am not sure what the case is here. It obviously is worth watching. Spot gold has risen quite a bit since last Friday. There is not enough data to suggest a correlation. However, if the entire IPO was placed, and the current gold holdings on the web site are accurate, they need to acquire almost 10 tonnes of quality physical bullion in a market reported to be tight in deliverable quality supply.

And the purchase is large enough so that we ougbt to be able to see an inventory drawdown somewhere. I have heard the buying will be done in London, and not at the Comex. The last purchases of this size were supplied by the IMF directly.

Above and beyond the short term interest in potential physical gold buying pressure, the Trust has some promising innovations in terms of holdings and transparency as compared to some other similar funds.

What I found personally appealing, subject to additional detail, is the ability for individual unit holders to redeem their shares for delivery in as little as one bar of London bullion, at the NAV but subject to delivery fees. This will obviously have its appeal for those who wish to add bullion for retirement accounts, with an eye to taking physical delivery at some point without incurring storage fees which can be significant over time.

I will leave the detailed analysis of this trust to more capable people who specialize in analyzing ETFs and Trusts. I have to admit that the IPO completely escaped my attention, although I did know it was coming some months ago. I had read enough then to know that it met some of my personal needs, based on my holdings and age. I find it more suitable than GLD for example, which seems to be a speculative trading vehicle. I prefer the Trusts like CEF and GTU for some things, and the redemption policy of PHYS seemed to be advantageous even compared to them. But more details are required.

As always perform your own due diligence and if needed discuss your investments with a qualified investment advisor.

Disclosure: I bought some units yesterday despite not feeling comfortable yet about being able to calculate the NAV for myself, and not having some of the details regarding redemptions and the status of their holdings and the IPO. It was some months ago that I read the prospectus. The NAV was indicated yesterday at 9.49 by the company on their site from Friday, which was less than 2 percent premium at yesterday's market price, which is advantageous and more than reasonable for my purposes.