Friday, May 21, 2010

Attempted Debunking Of Sprott Physical Gold Trust

The bulk of Lara Crigger's article is a defense of the SPDR Gold Shares Trust (GLD): she notes that GLD doesn't dispense physical gold to ordinary investors, but stock ETFs don't dispense stocks. The rest of it is an attempted debunking of Sprott's Physical Gold Trust (PHYS; PHY). Noting correctly that PHYS is structured as a closed-end trust, she claims that it's rigged because it can't issue new shares for gold like GLD does; that means PHYS can sell at a premium to its intrinsic value, which it is right now.

The trouble with her argument is that it doesn't account for the fact that popular closed-end trusts sell above their net asset value (NAV) simply because they're popular. Back in the early 1990s, when European economic integration caught the investment world's fancy, a German-equity closed-end fund sold at double its NAV at the peak of the resultant Eurostock frenzy. There wasn't any scam or issuer hype behind that premium; it just caught investors' fancy. PHYS has gotten nowhere near that level.

Normally, closed-end trusts sell at a substantial discount to NAV. Part of the reason why Sprott's is structured for withdrawals is to minimize that discount.

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