Hot Silver Funds Can Scald; Sprott Moves To Lift Restrictions

The growth in assets came as popular funds such as the iShares Gold Trust (SLV) and the ETFS Physical Silver Shares (SIVR) continued to generate greater returns.

As a result, almost 90 million shares of SLV traded on Wednesday alone, notes Zweig.

But he warns that such heady activity may come with some dark clouds lingering overhead.

In particular, he looks at the Sprott Physical Silver Trust (PSLV). The closed-end fund finished Thursday trading at a premium to its net asset value, meaning that effectively investors were paying $1.22 for every dollar’s worth of silver in the portfolio.

The silver in the fund was actually worth $18.15 a share, even though the market price of PSLV’s shares was $22.11, or a 22% premium.

Investors seem to prefer Sprott’s decision to store silver in the Royal Canadian Mint rather than the more common practice of using commercial bank vaults. Big holders can also redeem shares to Sprott and get pure silver bars in return, adds Zweig.

The CEF’s returns can, in certain instances, trigger capital gains at 15% — the same level as conventional stocks — rather than higher rates typically associated with commodities transactions, he points out.

But in a filing this week with the SEC, Sprott moved to eliminate restrictions on 26% of the fund’s total units that the manager bought last year for its own accounts at $10 each.

“Until now, those shares have been held off the market by chief executive Eric Sprott and several affiliates of the firm,” Zweig notes.

He adds that now those shares “can be sold at any time, which would increase the number of the fund’s shares available to trade and could depress the price.”

Zweig goes into more particulars about silver funds’ tax consequences and issues dealing with redemptions and purchases of silver funds. (For WSJ subscribers, it’s worthwhile to read the entire piece linked above.)

The warning here is that silver funds — and commodity ETFs in general — can wind up snagging a bigger portion of your gains than might otherwise be the case in other types of funds.