We have recently been critical of the Sprott gold fund (AMEX: PHYS, TSX: PHY.U) as a way to gain exposure to gold prices because of the large premium to NAV that has been built into the share price as a result of amateurs flocking to PHYS because it is supposedly safer than the alternatives like the SPDR Gold ETF GLD or even the Central Fund of Canada (TSX: CEF-A, AMEX: CEF). Thus we were not surprised that on a day when gold was up about 1%, PHYS actually fell more than 8% after it was announced an offering of 21.6 million units was completed at a price of US$11.25. Way to track the price of gold, Mr. Sprott!
Alas, even after the decline today PHYS still carries an unacceptable 10%+ premium to NAV although it has declined from 23%+ at the close yesterday. We continue to believe PHYS at a large premium to NAV is a terrible way to own gold unless you are a broker who gets to buy it at the IPO price and then distribute it to the retail (and we suspect a few hedge fund) suckers. What a racket and what a great example of markets behaving irrationally.