Golden Minerals Company

It has worked for gold plus a number of other metals including molybdenum and uranium -- though it didn't work for copper -- and the hope now for the promoters is that it will work for silver. We are talking about the Sprott Physical Silver Trust, which wants to raise capital via the sale of US$10 units.

As the name suggests, the issuer will use the proceeds to invest in physical silver bullion. "The Trust seeks to provide a secure, convenient and exchange-traded investment alternative for investors interested in holding physical silver bullion without the inconvenience that is typical of a direct investment in physical silver bullion," states the prospectus.

The document offers a number of reasons to invest in physical bullion: It's convenient, all the proceeds will be invested in physical silver; the silver will be stored at the mint and the trust will be able to secure lower transaction costs than investors doing it themselves. But the fund is geared to those who like their income in the form of capital gain; the trust does not intend to pay any dividends.

But one wrinkle is that once a month, unitholders will be able to redeem all or some of their units and receive physical silver. It's not immediately clear why a unitholder would want to do that, other than to provide unitholders with comfort that they can get their hands on the metal.

From Sprott's perspective, the hope is that its silver deal does better than a deal launched last year by Claymore Investments. That fund, which is not actively managed, was formed "to replicate the price performance of silver bullion, less the Fund's expenses and fees." The fund sold 3.6 million units--for gross proceeds of $36-million. Later, when the warrants were exercised, the issuer had about 7.1 million units outstanding. That fund, which hedges its US$ exposure, doesn't pay a dividend.

That fund didn't allow for annual redemption whereby the unitholders could receive physical silver. Instead it did offer an annual redemption where unitholders could receive net asset value -- less some expenses --in cash.

And some investors have taken advantage of that feature. For instance, Bermuda-based Osmium Special Silver Situations Fund announced earlier this month that it owns a 16.37% stake in the trust and has requested that they be redeemed. This new silver offering comes a few months after Sprott Physical Gold Trust raised US$442.5-million in its initial public offering via the sale of units at $10 a shot. Last month the same issuer did a follow-on offering and raised another US$279.5-million from the sale of units priced at US$11.25. Last year, Claymore Gold Bullion Trust started the process when it sold units with each unit consisting of a unit and a warrant: When the warrants were exercised, the issuer ended up with more than 83 million units outstanding. Later the entity was converted to an exchange-traded fund.

One reason for the popularity of funds that invest in physical metals is the favourable tax afforded U.S. institutions. The prospectus talks about the capital gains advantages for such buyers: The tax rate is 15% (though it will rise to 20% by year end) on such investments compared with the normal 28% tax rate. On Claymore's gold offering, more than one-quarter of the proceeds came from U.S. institutions -- an unusual situation given that most have an in-house investment management capability -- and prefer to do it themselves than pay some external manager.