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Will Sprott's Brand New Physical Silver Trust Become JPMorgan's Biggest Nightmare?
Following hot on the heels of his blockbuster physical gold ETF, which at times has been trading at a premium as high as 30% over NAV, indicating the willingness of investors to pay over fair value just to know that their asset claims wouldn't be diluted to nothingness on a moment's notice (here's looking at you GLD), the Canadian asset manager is launching a comparable physical ETF, this time investing with silver: the Sprott Physical Silver Trust. This is not looking good for the LBMA and JPM - since the silver market is allegedly even tighter than gold, yet just as manipulated by JPM and the LBMA (as evidenced by our earlier post on intraday gold prices) and locating physical can be far more problematic, the elimination of a few thousands tonnes of the precious metal out of circulation is sure to create quite a few sleepless nights for Jamie Dimon's PM manipulation club, who may suddenly find itself with a massive short position covered by even less actual deliverable, bringing the much anticipated monumental short squeeze one day closer. For all those wondering just how the silver market is manipulated and why control over the precious metal is so critical, we refer to a previous post: A Deep Insider's Walkthru To Silver Market Manipulation.
Here are some observations on Sprott's latest offering from the Financial Post:
As the name suggests, the issuer will use the proceeds to invest in physical silver bullion. "The Trust seeks to provide a secure, convenient and exchange-traded investment alternative for investors interested in holding physical silver bullion without the inconvenience that is typical of a direct investment in physical silver bullion," states the prospectus.
The document offers a number of reasons to invest in physical bullion: It's convenient, all the proceeds will be invested in physical silver; the silver will be stored at the mint and the trust will be able to secure lower transaction costs than investors doing it themselves. But the fund is geared to those who like their income in the form of capital gain; the trust does not intend to pay any dividends.
But one wrinkle is that once a month, unitholders will be able to redeem all or some of their units and receive physical silver. It's not immediately clear why a unitholder would want to do that, other than to provide unitholders with comfort that they can get their hands on the metal.
From Sprott's perspective, the hope is that its silver deal does better than a deal launched last year by Claymore Investments. That fund, which is not actively managed, was formed "to replicate the price performance of silver bullion, less the Fund's expenses and fees." The fund sold 3.6 million units--for gross proceeds of $36-million. Later, when the warrants were exercised, the issuer had about 7.1 million units outstanding. That fund, which hedges its US$ exposure, doesn't pay a dividend.
That fund didn't allow for annual redemption whereby the unitholders could receive physical silver. Instead it did offer an annual redemption where unitholders could receive net asset value -- less some expenses --in cash.
And some investors have taken advantage of that feature. For instance, Bermuda-based Osmium Special Silver Situations Fund announced earlier this month that it owns a 16.37% stake in the trust and has requested that they be redeemed. This new silver offering comes a few months after Sprott Physical Gold Trust raised US$442.5-million in its initial public offering via the sale of units at $10 a shot. Last month the same issuer did a follow-on offering and raised another US$279.5-million from the sale of units priced at US$11.25. Last year, Claymore Gold Bullion Trust started the process when it sold units with each unit consisting of a unit and a warrant: When the warrants were exercised, the issuer ended up with more than 83 million units outstanding. Later the entity was converted to an exchange-traded fund.
One reason for the popularity of funds that invest in physical metals is the favourable tax afforded U.S. institutions. The prospectus talks about the capital gains advantages for such buyers: The tax rate is 15% (though it will rise to 20% by year end) on such investments compared with the normal 28% tax rate. On Claymore's gold offering, more than one-quarter of the proceeds came from U.S. institutions -- an unusual situation given that most have an in-house investment management capability -- and prefer to do it themselves than pay some external manager.
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OK, I have posed this question before.
When do you sell? Never ain't gonna cut it. Let's be realistic here. I have thought about this, and I just don't have an answer. If this new ETF finally decouples paper from physical, and a squeeze play pops silver to double what you paid, would you sell it then? How about if it quadruples what you paid? If you do sell, then what do you roll the FRN's into that would be as safe and useful in a SHTF scenario? I haven't been able to answer this question whenever I mull it over.
Well, what says the educated masses here?
It all depends on how the FED reacts to the upcoming double-dip recession (see ShadowStats plummeting M3 and steep fall in the Baltic Index).
If the FED starts QE 2.0, then you won't want to sell your Sprott Silver for $FRN, which could lose value quickly. You will probably exchange it for Canadian dollars, which I'm sure is an option.
If the FED stands pat, then we will go into a depression, and you will WANT $FRNs, which will appreciate vs silver.
Thanks, that much I had pretty much gleaned from reading some very good books by Ruff and Prescher (I like to balance my reading views).
But lets take on the specifics - at what point do you realize that QE2 has peaked and you want to maximize your return on the PM's in your possession? What about if the bottom drops out, how will I know to unload PM's to get my FRN's to tide me through?
Reading that question again makes my head hurt - am I asking you guys to tell me how to call a trough or a peak? I guess so.....
Why would anyone buy Sprott's physical ETF at such high premiums? You can walk into any Scotiabank and buy gold coins for what I consider a high premium -- around 8%. A bit of shopping around and you can buy them for much less.
Can anyone give me a single good reason to buy Sprott's ETF at a premium to NAV of anything more than about 5%?
Further, BullionVault and GoldMoney allow customers to take delivery (if I recall correctly) and all-in the cost there would also be less than 5%. I really see absolutely no reason to buy Sprott's fund at a premium of 12.55%!! (see http://jessescrossroadscafe.blogspot.com/2010/07/net-asset-value-of-cert...) but would greatly appreciate some ideas.
Any users here own PHYS? If so, why?
Thanks.
Because your tax rate is at 15-20% cap gains in Sprott's funds, not 28% like you incur when you sell your coins or SLV or GLD. What? You have to pay cap gains when you sell your gold/silver coins? Yes, you do.
So, a typical premium on gold coins would be, say 5%, while the marginal tax benefit from being in Sprott Funds would be 8%-13%, so a reasonable premium for Sprott funds would be 13%-18% versus buying gold/silver coins.
I am speaking from an institution's persepctive. A joe-six-pack should just buy gold/silver coins, no question. But that is not so easy for institutions to stop by the coin shop every month. They need to buy actual funds.
"What? You have to pay cap gains when you sell your gold/silver coins? Yes, you do."
I honestly didn't know that. What mechanism is in place to track this? I know that part of the financial non-reform bill has a section in there dealing with filing an IRS Form 1099 for cash transactions greater than $USD 1K, but that has been tried in Europe to less-than-smashing success. People will just sell $USD 990.00 worth each time.
Anyway, why pay taxes "for getting change"? I give them notes, they give me coins. I give them coins, they give me notes. What if I trade silver AE's for junk silver, then buy paper? They sure know how to complicate matters, don't they?
To avoid closing out their IRA, folks might want to buy PHYS in order to preserve wealth. That is, if they don't think the Fed Govt is going to seize IRAs and 401-Ks soon.
If soon means next week, they're probably right.
But by the time it's obvious the govt is going to seize IRAs and 401-Ks, you might not get your bank to hand you the cash in time.
Well - Canada didn't follow the US into Iraq, nor did we confiscate our citizens gold. So there may still be hope for us yet. ;-)
Goldbuggery is alive and well here in Canada....that doesn't sound right.
I get my Silver Bullion at Bullionvault:
http://www.bullionvault.com
The costs of using BV according to my T&C's are:
"You pay only two charges in the normal course of using BullionVault:
This is a maximum of 0.8% per trade, and falls to a minimum of 0.02% depending on the amount of gold or silver you buy or sell in the year.
0.12% per year on gold, billed monthly and subject to monthly minimum of $4.
0.48% per year on silver, billed monthly and subject to monthly minimum of $8
One really must take pause when reading this thread. A large portion of the discussion has been devoted to how wealth can be protected from confiscation (theft) by the government. There is no recourse if victimized. It is devolving into a discussion of how to hide your money from a cunning thief.
It's pathetic.
Sprott's shares trade on the open market. Sometimes they get bid up quite high, other times not so high.
You can find the asset value, the market value and premium on Sprott's web site.
Possibly some buyers are not aware of this when they buy.
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