Buying Gold For Less Than It's Worth

Wild swings in gold and silver prices are creating unusual gaps between the value of physical metals and the funds that hold them.

In recent weeks, those disconnects have grown large enough to catch the attention of investors willing to tolerate complexity and volatility.

The clearest example is the Sprott Physical Gold and Silver Trust $CEF ( ▲ 6.53% ), a $10 billion closed-end fund backed primarily by physical gold and silver stored at the Royal Canadian Mint.

At the end of last week, the fund traded at a discount of about 9.5% to its net asset value. Days earlier, that discount briefly exceeded 11%, even as gold and silver prices were near recent highs.

Closed-end funds often trade below net asset value, but the scale matters. Since its 2018 launch, the Sprott fund’s discount has typically hovered around 4%.

The recent widening coincided with extreme price volatility, including record one-day drops in both metals, followed by sharp rebounds.

In effect, investors buying during the peak discount were paying well under a dollar for a dollar’s worth of bullion. That timing proved painful in the short term as metal prices fell.

Still, for investors already inclined toward precious metals, such discounts offer the possibility of enhanced returns if the gap later narrows.

Similar patterns have appeared across Sprott’s other bullion funds. Discounts in its silver and gold trusts widened abruptly before partially contracting again.

The episode underscores a broader lesson. During periods of intense volatility, even closely related assets can become temporarily disconnected, and those gaps can persist longer than expected.