This may be the first time
I have ever written a RANT topic in the morning. However, when I
compiled the below data, I felt compelled
to put it ahead of the queue.
Over the past decade, NO ONE has done more analysis on the closed-end
funds CEF, GTU, and SVRZF (run by the Spicer family); and the more recently
public Sprott funds – PHYS and PSLV. I don’t
hold positions in these funds today – and likely NEVER will due to the
heightened risks described below – but have in prior years.
Given I have written about these funds ad nauseum over the
years, I will not discuss all aspects in this article. In a nutshell,
all five funds are run by honorable
people with their shareholders’ best
interests at heart. Additionally, I have ZERO doubt that
every ounce of gold and silver purported to be in the funds is in fact there;
safe and sound in secure vaults in Canada…
However, they are still “PAPER PM Investments”; and thus, subject to
not only typical stock market risks; but in many cases, those of mining stocks – such as:
1. Systemic risk
– if stock markets, banks, or brokerages where such stocks are held or traded are suspended, you
may never see your investment again.
2. Taxation risk
– The government could impose “windfall” capital gains taxes at any time.
3. Naked shorting
risk – The Cartel can (and does)
naked short closed-end shares, to prevent premiums to net asset value, or
NAV, from rising enough to justify new offerings; and at times – particularly
in down markets, like THIS YEAR – push them below NAV. Per the below table, this is precisely what happened
this month; as three of the five funds are now trading below NAV, and the
other two at or barely above it…
4. Redemption Risk
– In the “Spicer funds,” share redemption for actual metal is not
permitted. For the “Sprott funds,” redemption
is possible in certain situations, but only in large amounts. More
importantly, the gold and silver held by these funds is the least desirable in the bullion
investment universe. The PHYS gold fund generally holds 400
ounce bars that few individuals on the planet can afford, while the PSLV
silver fund holds 1,000 ounce bars. In the real world, such bars often
trade below NAV
due to their impracticality; let alone, heightened counterfeiting risks.
5. Confiscation
Risk – Although infinitesimal, in my view (as I believe
Canada to be one of the safest PM jurisdictions in the world), the giant,
well-documented stashes of PHYSICAL gold and silver could have giant “X’s” on
their back during a monetary crisis.
6. “Trigger Risk”
– The ease of selling such funds with the “click of a mouse” often causes
investors to “pull the plug” during sharp declines; just as they do with mining stocks. The
Cartel knows this, and uses this psychological “fear factor” against you.
Irrespective, some people still hold “PAPER PM investments”; either
out of necessity or
because they feel more “comfortable” that way. That’s fine, but the
risks above are EXTREMELY powerful. However, the final risk factor
(below) may trump all the
aforementioned ones; as it may mean the difference from benefitting from PM price
increases or NOT…
7. Proxy Risk
– This is the risk the funds do not perform as well as the underlying gold
and silver – which is entirely possible; as by definition, CLOSED-END FUNDS can trade at
either a premium or
discount to NAV.
I have long discussed my suspicion the Cartel naked shorts these funds
to keep the premiums low; knowing (particularly in the case of the Sprott funds) that as soon as the premium reaches a
reasonable value, new offerings (and metal purchases) will be made.
Alternatively (and/or concurrently),
the NAV premium could contract (or discount widen) due to the aforementioned
risk factors; just as is the case with the GLD and SLV ETFs – which currently
trade at 3% discounts to
their underlying Net Asset Values.
What prompted this RANT was the performance of these funds in the past
three weeks; amidst the Cartel’s latest brutal
attack. As you can see, ALL FIVE funds dramatically underperformed
PHYSICAL gold and silver – on average, by 2.1 percentage points – including
an astounding 3.2 percentage points for the bellwether CEF fund…
Better yet, I went to CEFConnect – a
database of Closed-End Fund data – to find graphs of the historical
performance of these funds. To start, here’s CEF (Central Fund of
Canada); which as you can see, averaged a roughly 7%-12% premium to NAV for
the first decade
of the PM bull market.
However, once silver and gold hit ALL-TIME HIGHS in May 2011 and
September 2011, respectively, said premiums suddenly collapsed. I’ll leave
it up to you to decide the reason; but irrespective, it now trades at a discount to NAV; i.e., its
lowest level in a decade…
And as you can see below, the same has occurred in all five funds. Actually,
the database doesn’t have info on the extremely illiquid SVRZF fund.
However, as shown in the table above, it currently trades at the largest discount of the five
funds. Here’s the Spicer
gold fund, GTU…
…the Sprott gold fund
PHYS…
…and the Sprott silver fund PSLV…
I will not speculate as to a specific
cause (or causes) of the atrocious
recent performance; at a time when access to HONEST, LIQUID, PHYSICAL gold
and silver assets should arguably trade at higher
premiums. However, the “proof is in the pudding”; and don’t
think for a second they
can’t decline to steep
discounts to NAV in the future; particularly as governments become MORE
desperate to suppress PM prices.
Remember, when PROTECTING one’s assets against inflation and draconian government acts,
there is no substitute for PHYSICAL gold and silver. I am not saying
there are ZERO risks to anything. However, compared to “PAPER PM
Investments” like ETFs, mining
shares, and even closed-end bullion funds, PHYSICAL gold and
silver have BY FAR the lowest risk profiles
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