In a Barron's column, Randall W. Forsyth uses Eric Sprott's new Physical Gold Trust closed-end fund (PHYS) as an example of a bit of exuberance creeping in to the gold market. Formerly trading more than 20% above its net asset value, PHYS dropped a fair bit when Sprott executed a secondary offering. Even after, the premium is still around 13%.
One of the reasons why PHYS is selling above intrinsic value is a certain misapprehension. The fund can't go much below its intrinsic value because of the redemption feature. Its closed-end nature seems to have people believing that it can go well above its intrinsic value, however, because it can't issue shares like an ETF can. The fact is, PHYS can issue more shares to take advantage of any premiums. The process is more labourious than an ETF share issuance, as well as more expensive, but it can be done. There are no limits to how many secondary offerings a closed-end fund can undertake, except for the time factor. PHYS could continue to issue more shares in other secondary issuances until its premium has been whittled down to effectively zero.