Sprott Launches Real Bullion ETF

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Includes: GLD, SLV
by: Jeff Nielson

Regular readers will be familiar with my warnings and criticisms of most of the bullion-ETFs, with the two largest entities (GLD, SLV) being the most dubious and dangerous – simply because those are the funds who are holding the largest amount of “paper promises” (i.e. custodian agreements) from the bullion banks.

For those who missed these earlier commentaries (most recently “Your ETF-Silver is For Sale”), what we are supposed to believe is that these same bullion banks who are the largest “shorts” in the history of commodities are helping small investors enter the sector on the long side – by supplying infinite quantities of bullion to these ETFs, with virtually no profit for themselves. It's hard to decide which is the most implausible aspect of this scenario: bankers performing services for no profit, or banker-shorts helping small, long investors.

However, many investors who do want to invest in precious metals, do not want to have to deal with the primary issue of holding physical bullion: storage. While I personally believe the expense/inconvenience of storing one's own bullion is far outweighed by the security it provides, I certainly understand that many investors see this issue differently.

There are already a few legitimate bullion-ETFs, but a new entrant was announced for this sector – from a company which is a “brand name” to many who invest in commodities: Sprott Asset Management. The company was initially founded in 1981 by Eric Sprott, a man whose knowledge and insights into commodities in general, and gold in particular, are widely respected.

This new investment vehicle is called the Sprott Physical Gold Trust, leaving absolutely no doubt that this ETF will not be merely holding paper promises – but actually storing their own bullion. It will trade on both the TSX and NYSE, making it easily available to all North American investors. The fund is planning a $575 million IPO, although no date for the launching of this fund was provided with the SEC filing.

Do not expect this fund to precisely mirror GLD, since the costs of directly storing bullion will mean higher management fees, than for ETFs merely “storing” a handful of paper. However, investors should expect that those net costs would be lower than if they bought and stored their own bullion, and investors still have the security of knowing they are invested in real bullion.

Naturally, all investors are advised to carefully examine the full prospectus for this fund when it is set to launch, to make sure that the fund does, indeed live up to its name. Personally, I can see no purpose for someone like Eric Sprott to launch a new bullion-ETF if he was merely going to copy the paper/custodial model of GLD. The object of the fund clearly appears to be to provide precious metals investors with an alternative to GLD which does not suffer from the same risks/vulnerabilities of relying upon the good faith of banker-oligarchs.

Disclosure: I hold no positions in GLD or SLV