A Sprott Fund That’s Not

January 30, 2012

The recently registered Sprott Physical Platinum and Palladium Trust is just convoluted.

A few weeks ago, Sprott Asset Management, a Canadian firm owned and operated by Eric Sprott, filed to launch its third physically backed closed-end fund, worth $115 million.

First off, let’s dispel any misconceptions about what an ETF truly is. To the vast majority of investors out there, an ETF is an open-end fund traded on an exchange that at its core has all the benefits of the creation/redemption mechanism that keeps its price pegged, as closely as possible, to its net asset value.

Calling a closed-end mutual fund an ETF, as Reuters did in a story about Sprott’s plans, simply because it trades on an exchange—is wrong. Dave Nadig and I are on the same page on this. He had a similar complaint almost two years ago about the launch of the Sprott Physical Gold Trust.

Poor Alternatives To Gold And Silver

Investing in physically backed funds is a safe haven for jittery investors. The benefit of holding physical gold and silver is to guard against economic, political or social instability—the more uncertain the outlook, the higher the prices of gold and silver.

Meanwhile, platinum and palladium perform a bit differently in the market, and may not be ideal alternatives to gold and silver.

Platinum group metals (PGMs) have many industrial applications in manufacturing. According to the World Gold Council, 66 percent of platinum and 93 percent of palladium are used in industry, compared to 11 percent of gold.

Therefore, the prices of platinum and palladium partly depend on the demand for the products that they help produce. In other words, platinum and palladium are more tied to cycles of industrial demand than gold and silver.

The graph below illustrates the price of gold versus platinum per troy ounce. Note the drop in price of platinum during the unraveling of the 2008-2009 market crash, as well as the surge in gold prices in late 2011 brought on by tension in the Middle East, S&P’s downgrade of U.S. debt and the European sovereign debt crisis.

Gold vs. platinum price

For savvy investors who already knew this, arguing that the Sprott Physical Platinum and Palladium Trust is a convoluted investment is hardly a stretch.

Hodgepodge Exposure

The platinum/palladium fund is markedly different from its physically backed sister funds—Sprott Physical Gold Trust (NYSEArca: PHYS) and Sprott Physical Silver Trust (NYSEArca: PSLV)—since it combines two precious metals in one fund.


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