The buzz the past few trading days has been the issuance of a new gold closed-end mutual fund with some unique features—redemption (not spiritual), or the ability to take delivery of 400 ounce gold bars, and potential tax advantages. Toronto based Sprott Asset Management raised $400M in an IPO February 26, 2010 of PHYS (Sprott Physical Gold Trust).
On March 3rd the fund will have cash from settlement and will start buying 400 ounce gold bars. It will do so through bullion dealers in Toronto and London. The gold purchased will be with nearly the full sum of proceeds and delivered as London Good Delivery to the Canadian Mint where it will be stored.
As a closed-end fund investors can expect the PHYS to trade at a premium or discount to NAV (Net Asset Value) at any time.
Further fund management has indicated a desire to sell new shares periodically (they’d like to raise an additional $600M) as is typical of other closed-end funds. New share issues would be dilutive to existing holders, causing shares to fall, if only temporarily. This often leads to some short-term frustration since this often happens just when the NAV and premium for existing shares is rising. Demand must be strong in this case and fund management will take advantage of it, which is a business decision.
Also consistent with closed-end funds versus ETFs are higher fees. The PHYS annual fee is .60% versus popular gold ETFs like GLD (SPDR Gold Trust ETF) and IAU (iShares COMEX Gold Trust ETF) with management fees of .40%.
The tax advantage per the prospectus states: “Any gains realized on the sale of units by an investor may be taxable as long-term capital gains (at a maximum rate of 15% under current law)”. This would then avoid the 28% tax on collectables also under current law. There may be circumstances where this can all change obviously.
The redemption feature works as follows:
An investor in the fund may take physical delivery of a minimum of one 400 ounce bar by contacting the fund on the 15th of each month outlining the details of the delivery request including number of bars and so forth. It’s up to the holder to make arrangements for delivery and this can be cumbersome. However, an investor may opt to arrange with Brinks or another armored car service to pick-up the gold and transfer it to another storage provider who will take and hold London Good Delivery bars. Currently this might cost $2500 per bar which isn’t that costly given prevailing value of a bar at around $450,000. Or, if you’re feeling man enough, you can pick bars up yourself and toss them in the trunk of your mini. Um, bring your shotgun.
So what’s the big deal about redemption and taking delivery anyway?
Because you can.
This brings peace of mind to those with more extreme views who question the validity of assets backing various ETFs currently so popular. For example, the COMEX has recently changed physical delivery previously customary for most commodity contracts. They might issue a certificate for an ETF like GLD in lieu of delivery.
Other more extreme views prevail regarding this issue. Many coin dealers and other vendors (“GOLD…Call Now!”) trash competitive products like current ETFs since they have coins to sell. They play to your fears of a financial Armageddon arguing you’ll need to hold the metal in your hand to buy bread.
Also, given the financial roller-coaster infecting the global financial system, many fiduciaries are bound to insure clients and members that they have access to the “real deal”.
Further, a 400 ounce bar cost is expensive, precluding delivery for most retail investors and making it an institutional investment.
What conditions would need to exist for investors to take delivery? A financial Armageddon where gold prices are soaring not falling. In that case, the cumbersome nature of the redemption process is a small inconvenience. Aside from taking comfort in the integrity of what you own, delivery is the ultimate attraction.
Won’t all these gold issues affect gold prices? Not necessarily. However, supplies and new gold discoveries are lessening. There remains activity on both sides of the market. Many central banks (and the IMF recently) are selling, but others (Russia, China & India) are buying. Clearly, with an increasing supply of gold products such as PHYS available, gold has never been more in focus.
The many gold products coming to market are an indication of discomfort with current market conditions and monetary policies. We welcome PHYS as another choice for investors.
Disclosure: Long DGP