07 November 2013

Physical redemptions from Sprott precious metal funds

Kid Dynamite drew my attention to some redemptions from Sprott precious metal funds. Below is a table showing the redemptions in ounces since the beginning of this year (PSLV had has no redemptions).

Date Gold (PHYS) Platinum (SPPP) Palladium (SPPP)
Jul 2nd 400    
Aug 1st 8,354    
Sep 3rd 12,500    
Oct 1st   104 236
Nov 1st 17,260 280 660

We know these are redemptions because the prospectus says that redemption notices will be processed on the last day of the month (as long as received before the 15th of a month) and thus show up on the first day of the next month.
The question is why are people redeeming. If you look at the historical premium/discount to NAV for PHYS, PSLV or SPPP you will see that PHYS and SPPP have been trading at a discount to NAV of up to 1% and 1.5%, respectively. So if you are a largish holder who can take 400oz bars, why sell your shares at a discount when you can get the physical for 100% of NAV with fees of $5 a bar and $5 per ounce delivery (if you can't arrange your own, which you'd want to because $5 an ounce is nuts for any decent amount) or zero delivery cost if you have an account with the Canadian Mint. Note that PSLV has had very little time trading at a discount to NAV so we don't see any redemptions for it as you can sell on market at a fair price.
My guess is these are most likely physical redemptions as cash redemptions are done at a 5% discount to NAV (or a volume-weighted average price) so it makes no sense to redeem for cash and lose 5% when you can sell on market and only lose 1%.
So the Sprott funds are presenting a nice little arbitrage where you can buy gold at a discount. It is a bit hard to say if it is arbitrage or just a holder(s) from long ago getting out. As long as it continues to trade at a discount we should continue to see these redemptions. The discount is persisting I think because to-date only 2.4% of PHYS has been redeemed, which is probably not enough to move the price.
With all these claims that the bullion banks are out of physical reserves and about to blow up, it is unusual why we aren't seeing much more redemptions out of PHYS, especially since the bullion banks could do it at a discount, effectively getting paid to take PHYS' physical.
Maybe they don't believe PHYS has the metal - that is a joke by the way, which will only make sense to those who remember all the spin about how the PHYS and PSLV premium was an indication that people trusted the Sprott funds more because they were backed by real metal, as in logically then, those people should believe the fact the funds are trading at a discount means people must now not trust the Sprott funds. Lesson: don't ever pay a premium for a closed end fund, no matter how good the story.
Maybe the other reason is that the bullion banks aren't actually that desperate. There is nothing stopping them from coatchecking (comment dated Nov 6 7:00PM)out of PHYS, although I'm not sure what the borrow situation on PHYS has been like. And if  the bullion banks have "hit the bid" to loosen up metal from GLD, well the same effect happens to PHYS, so why would a bullion bank not step in and buy up PHYS shares being sold by weak hands to get hold of its physical?
Anyway, just some opinions/thoughts at this time (not facts) and something to watch.

Update: 19,200 withdrawn from PHYS on Dec 2.


  1. 38514 ounces are roughly 1,2 t of Gold, compared to GLD and other ETFs a completely nonevent, not worthwhile to start a discussion or waste any thoughts on it in my opinion...

  2. tax-loss selling in Canada???

  3. Could be tax loss selling, but it seems to be every month.

    While the ounces are small, the Sprott funds have not had any physical redemptions before so this is newsworthy in that respect and could be the start of a growing trend so I thought it worth noting.

  4. GLD is currently averaging redemptions of 46 tons per month. PHYS would be completely drained in about 45 days at that pace. Unless your goal is to attract attention and accelerate things I dont think the BB's will dip their bucket into that well.

  5. Just curious Bron - For GLD an investor would get an advantage exchanging gold for shares because of the liquidity and the free storage (or cheaper storage via fund fees). I would imagine that the same thing applies to PHYS.

    For a large holder of physical gold, Is there an advantage to storing one's gold at the COMEX versus GLD and the ETFs? Registered status versus eligible?


  6. For most retail investors the ETFs circa 0.4% management fee is cheaper than storing with most custodians.

    For multi-million dollar clients however they are more likely to get better storage rates outside an ETF.

    In the professional market there is no way an ETF is cheaper than a direct allocated account with a bullion bank.

  7. Bron, would you by chance understand the tax implications of the trust selling their gold. They probably sold gold which was bought at a higher price, thus giving their holders a capital loss event.

  8. Not up to speed on the detail of the tax implications. I think it is the trust which has the capital gain/loss from redemptions, that is the gain/loss is pro-rated across all holders, even thought it is only one holder who is redeeming.