sprott gold fund

 

Sprott Metal Funds Get Physical: A Closer Look

Summary

• For precious metals, the current economic condition is a "Goldilocks" position.
• The physical market is now constricted owing to supply cutbacks from miners and sold-out mints.
• To avoid potential delivery concerns, the CME has tightened limits on gold futures.
• Sprott Physically-backed funds are a better option because they are redeemable and contain tangible metal.
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Precious metals are one of my favorite long-term ideas today, as I've outlined in a number of recent writings. Some relevant articles include:

"SLV: Silver Is Eternal, Deflation Is Temporary"  
While I like these ETFs and am optimistic about all precious metal funds (except palladium), COVID is causing some concerns in the current metal market. It's worthless if your paper metal isn't backed up by actual delivery.
Due to high demand from people seeking physical wealth protection, the physical precious metal market is currently overburdened. Bullion dealers are largely sold out, and their prices have risen well above current rates.
 Even the United States Mint has run out of its popular American Eagle Silver coins, and the Royal Canadian Mint has declared its closure. Even the Perth Mint in Australia has run out of most of its supplies.
To avoid exceeding delivery demand, even the CME had to raise margin maintenance requirements to 19.3 percent.Larger contracts for 100-troy ounce, 400-troy ounce, and 1-kilo gold bars will be introduced next month, since many workers are returning home throughout the world and larger contracts require fewer human hands for delivery.
 The CME believes there is sufficient gold in the market; the main difficulty is that the globe is moving considerably more slowly than it was a few weeks ago.
However, as physical demand rises, the availability of new precious metals is anticipated to fall. Newmont Corp. (NEM) has announced that it will shut down four mines due to COVID, resulting in a 20% reduction in output.At least a third of the top miners have lowered their output objectives. 
The blow will be felt most acutely in the platinum industry, since South Africa has put miners on a three-week hiatus; South Africa produces the vast majority of platinum.
Obviously, because of the scarcity, owning real metal is going to be incredibly tough today. You can acquire miners who generate real metal, but most of them will sit inactive for a while. Miners, in my opinion, are a terrible investment since production will decline more and for longer than most people predict (maybe six months from now).
Sprott's actual precious metal funds, which are redeemable for real metal, are, in my opinion, the finest offer you'll find today.

Let's look at what distinguishes these funds from their future-backed rivals.

Is Each Sprott ETF Redeemable?

Being a physically-backed metal fund is one thing, but being a redeemable physically-backed metal fund is quite another. Because real metal is currently selling at such a premium, Sprott funds have a significant advantage over other ETFs.

Let's get started with PHYS. This product invests in physically backed gold and has a 0.48 percent cost ratio.The Royal Canadian Mint is its bullion custodian, and it presently holds $3 billion in AUM, or 1.8 million ounces of gold.

Investors bought more of the fund than the fund's owners could buy of bullion when it first launched, causing it to trade up to 24 percent above NAV.Take a look at the following:

Recent examples include:

As you can see, the fund recently traded at a big discount as many people sold gold to meet their dollar liquidity demands. Due to the scarcity of bullion, I believe this will soon become a premium.

PHYS owners have the option to seek physical redemption on the final day of each month while the NYSE is open, at a price equal to the aggregate NAV per unit. This takes the shape of a "London Good Delivery Bar," which weighs between 350 and 430 troy ounces of gold. Importantly, the yearly information form states:

The quantity of London Good Delivery bars held by the Trust at the time of redemption may limit a unitholder's capacity to redeem units for actual gold and silver bullion. 

This implies that, while delivery is very certainly accessible at all times, it is not guaranteed. Cash can be used to pay for excess quantities.

It will cost $5/oz in transportation costs, plus $4/bar and around $100 in extra fees for delivery to the United States. Gold withdrawal fees could be as high as 1.5 percent.Only if you have enough units can you redeem them for tangibles. This is 400 oz. of gold right now. To redeem 50,000 units, or $658K at today's pricing, one would require 0.008 ounces of gold. Given that delivery is via armored truck, this is understandable.

This means that, while delivery is almost always possible, it is not always guaranteed. Excess amounts can be paid for using cash.

Transportation expenses will be $5/oz, plus $4/bar, and roughly $100 in additional levies for delivery to the United States. Withdrawal fees for gold could be as high as 1.5 percent.You can only redeem for tangibles if you have a sufficient number of units. Right now, there's 400 oz. of gold on the table. It would need 0.008 ounces of gold to redeem 50,000 units, or $658K at today's prices. This is understandable given that the delivery is made by an armored truck.

Except for the minimum of ten 1,000 oz bars, the main redemption regulations and costs for PSLV are the same. Because each unit is worth 36.7 percent of an ounce at current prices, this would require 27,161 units, or $146,000.

Last but not least, as shown below, the Physical Platinum & Palladium Fund is currently trading at a 13.45 percent discount:

Palladium makes up two-thirds of the fund, while platinum makes up one-third. Although I am negative on palladium, I believe this fund is a good long due to its large discount. Per unit, SPPP is worth approximately 0.33 percent of an ounce of platinum and 0.66 percent of an ounce of palladium.The fund's current price is $14.12, but its NAV is $16.08, and redemption requires 25,000 units. At current rates, this translates to 82.5 ounces of platinum and 165 ounces of palladium, or $353K.

To summarize, these funds are a far better approach for an investor to acquire actual precious metals if they are ready to spend a few hundred thousand dollars on them. Physical metal purchasers sometimes acquire on a retail basis with a big spread, which these funds mostly avoid.

More crucially, there are more "futures" precious metals available than there are metals accessible for acquisition, posing a significant danger in today's economic environment. I contacted Sprott's IR department about delivery and was told that, despite the fact that physical spreads are increasing owing to the scarcity, physical metal can still be obtained and delivered.

These funds have expense ratios that are comparable to futures funds, so they are a much better alternative, barring a significant spike in NAV premiums.

 Looking ahead

Overall, I feel it is one of the finest times to invest in commodities, with precious metals proving to be the best long-term investment. The price of gold divided by the M2 money supply is one of my favorite gold charts. The total value of cash, bank deposits, and other liquid forms of "money" is used to calculate the money supply.

The M2 is presently at $15.7 trillion and increasing at a rapid rate as the Federal Reserve uses its infinite potential QE program to turn on the "digital printing press." Because the stock of global gold does not increase at the same rate as M2, a rise in M2 should theoretically enhance the price of gold in the long term.

See the chart below for a recent strong increase in M2:

In addition, gold/M2:

As you can see, the price of gold/M2 is on a significant increasing trend. This indicates that gold's long-term tendency is to increase in dollar value. If you look back to the early 1980s, you'll notice that gold's actual value was much higher and then fell precipitously once the United States abandoned the gold standard.

The value of money has a considerable influence on gold in the near term. The 10-year inflation-indexed rate, which is the return on a TIP bond after inflation payments, is the best way to assess this. This is significantly negatively associated with gold, as seen below, and the recent jump in TIP rates is the major cause of gold's selloff:

 However, if you look closely, you can see that the rate has dropped again, which could help to boost gold prices (and most precious metals). Indeed, in order to assist the economy, the Fed will most likely buy US Treasuries in order to maintain this rate as low as feasible.

Overall, I believe gold is obviously in a new bull market, and that most other precious metals will likely follow suit. Investors can buy a futures-oriented fund like GLD or SLV, but they're probably better off with a physically-backed fund like PHYS or PSLV. These two funds trade extremely close to NAV, but they provide better security if shortages persist. If they do, many Sprott funds are expected to trade at a premium to NAV.

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