Sprott Physical Gold Trust (NYSEArca: PHYS) declined Friday morning while gold prices moved higher after the closed-end fund priced a follow-on offering.
PHYS was deviating from gold prices somewhat because the offering caused the premium to net asset value to contract. Closed-end funds such as PHYS can trade away from net asset value, based on demand for the shares.
PHYS is listed cross-listed on the Toronto Stock Exchange and NYSE Arca, and is managed by Sprott Asset Management, based in Ontario, Canada.
After Thursday’s close, Sprott announced a follow-on offering to acquire physical gold bullion. Friday morning, Sprott priced an offering of 23 million shares at $14.84 each.
PHYS closed Thursday at $15.06 a share, or a nearly 6% premium to the NAV of $14.26, according to Morningstar data. The closed-end fund was underperforming gold Friday because the offering caused the premium to narrow.
PHYS was down 0.9% on Friday morning after a temporary trading halt, while SPDR Gold Shares (NYSEArca: GLD) rose 2.2% along with gold futures. [Sprott Physical Silver Trust Declines After Follow-On Offering]
Trading volume in PHYS exploded Friday after the offering was priced. More than 7 million shares traded in the first two hours, compared with a 3-month daily average of less than 800,000 shares.
The fund is unique because it allows investors to redeem large blocks of shares in exchange for physical gold. The trust stores its gold in Canada.
Sprott discloses that the gold fund can trade at premiums or discounts to net asset value.
PHYS typically trades at a premium to NAV, says Morningstar analyst Mike Taggart in a report on the trust.
“Investors need to be aware that although legally the fund is structured as a trust, it trades as a closed-end fund. High premiums paid for shares could result in investor returns that do not track gold prices,” he wrote.
PHYS was launched in 2010 and there have been five secondary offerings that have collectively raised more than $1.5 billion in net proceeds, Taggart added.
“This trust has traded at a premium for most of its existence, and for much of that time it traded at a premium above 10%,” he said. “Investors need to be aware that, should they purchase shares at a steep premium, their returns will lag the returns of gold.”
Sprott Physical Gold Trust
Full disclosure: Tom Lydon’s clients own GLD.