Some are asking why there is a such a deep discount to net value on the Central Funds. I think the answer is fairly simple and I think I have explained this before.
There is no coincidence that there is a reasonably simple redemption facility in the Sprott Funds, and there is none in the Central Funds.
If one wishes to ‘unlock the premium or discount’ in Sprott all they have to do is to take delivery of some bullion.
How does one unlock the value in the Central Funds in the short term if the discount gets ‘out of bounds’ with historical norms?
The answer is that one does not. The only way to unlock the NAV is if the unit values rise and one sells the units. It works in a time of rising prices, but lacks ‘teeth’ in a period of falling metal prices.
Otherwise that value is only theoretically unlocked upon the funds liquidation, and distribution of assets to unit holders. They pay no dividend, and there is no redemption facility.
And this makes them a very safe short, and a somewhat problematic safe haven. And so when the metals are under pressure, they can be under quite a bit of pressure through market gamesmanship.
Do people short the Central Funds by borrowing sufficient shares and reporting them? Is naked shorting forbidden?
Are there any practicable rules for the well connected anymore?
Yes there are hedges that one can engage in to try and bet on a reversion to the norm for the Central Funds. But this is obviously not so efficient is it?
This post was published at Jesses Crossroads Cafe on 05 NOVEMBER 2014.
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