The Daily Capitalist: Where are the Sprott Physical Silver Trust’s customers yachts?  This investment vehicle, Sprott Physical Silver Trust (NYSEARCA:PSLV), is basically a closed-end fund. Its current asset value is $650 million. PSLV owns physical silver and earns a large guaranteed income for Sprott vehicles that charge somewhere near 1% yearly simply to hold the silver.

Anybody who thinks this at its core is a good deal for investors is mistaken. Shares in the trust trade actively, with small bid-ask spreads that appeal to day traders. The Trust is cleverly structured so that long-term gains are taxed at preferential rates in the U.S. under current law, as opposed to “commodity” tax rates that apply to gains in such vehicles as the SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV) and Central Fund of Canada Limited (AMEX:CEF).

Per the above link, shares of PSLV trade at almost a 22% premium to the value of the silver in the trust. Back in the days 30 years ago when stocks were shunned, an investment rule of thumb was propounded for closed-end funds, which own a fixed amount of an asset, which in those days were either stocks or bonds. This was that because the fund had ongoing operating expenses, the market price for the fund should normally be at a discount to the fund’s net asset value (NAV). The concept that the discount “should” be 10X the annual operating percentage expenses of the fund relative to its assets was accepted by many in the field. Thus, a 0.8% operating expense (the PSLV fund’s expenses last I looked) would be associated with an 8% discount of the stock market price to NAV. Under that old guidepost, PSLV “should” trade at 92% of NAV rather than at 122% of NAV.

Just as interest rates are back to levels of decades ago, who is to say that this old metric will not return?

If one is interested in owning a durable asset such as silver for the long term, one could pay a one-time premium to the market price and store it at no cost in one’s home and at very low cost in a bank vault. Other vehicles such as GoldMoney, BullionVault, private depositories, etc. are available. Then of course, if one wants to trade, there is the yet more liquid SLV; and there are the futures markets (if one ignores MF Global, and the Refco fraud).

So why is PSLV at such an immense premium to NAV?

I don’t know. I cannot think of a single reason for a retail investor to own it other than to perform short-term trading.

PSLV and similar “physical” vehicles appeal to those investors who are skeptical of “mainstream” funds such as the GLD/SLV funds. But the “physical” funds are still stocks. That’s all the investor owns. Unless one owns vast amounts of PSLV, one has no claim to the underlying asset, just to the share. If the price of silver held steady for one year, and the premium to NAV went to zero, an owner of PSLV will be down close to 20%. That strikes me as bad odds. So I would say, if one wants to own physical silver, why not get physical, the real thing?

I thus continue to favor the thesis that this mispricing of PSLV suggests that there is “too much” optimism about the price of silver amongst a segment of serious silver investors. In contrast, I was an aggressive silver investor not all that long ago when both PSLV and Silver Bullion Trust got going with little or no premium to NAV, and when silver was well below $20/ounce.

Given that this is occurring in the face of multi-month downtrends both in the silver price and in the U.S. price inflation data , I continue to wait for a better buy point.

As Louise Yamada said, because there is always a bull market somewhere, the biggest mistake investors and speculators make is risking permanent loss of capital.

The games continue. The more experienced I get, the more I just like to stand aside when I don’t like the odds.

Related Tickers: Sprott Physical Silver Trust (NYSEARCA:PSLV), ProShares Ultra Silver (NYSEARCA:AGQ), SPDR Gold Trust (NYSEARCA:GLD), ProShares UltraShort Silver (NYSEARCA:ZSL), iShares Silver Trust (NYSEARCA:SLV).

Written By DoctoRx From The Daily Capitalist

The Daily Capitalist comments on economics, politics, and finance from a free market perspective. We try to present fresh ideas the reader would not find in contemporary media. We like to call it “unconventional wisdom.” Our main influences are from the Austrian School of economics. Among its leading thinkers are Carl Menger, Ludwig von Mises, Friedrich von Hayek, and Murray Rothbard. There are many practitioners of this school today and some of their blogs are shown on the blogroll. We trace our political philosophy back to Edmund Burke, David Hume, John Locke, and Thomas Jefferson, to name a few.

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