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Is Sprott in the Market Trying to Buy 10 Tonnes of Gold?

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March 02, 2010 – Comments (5)

From Jesse's Café Américain.

BTW, I just email the Caps administrator to add the ticker: PHYS

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Sprott Asset Management is involved with a new physical gold bullion trust, now trading with the ticker symbol "PHYS."

The IPO for the fund was last Friday 26 February, with a reported 40 million shares outstanding at 10$Cndn. The trust is not yet listed in Toronto, but is actively traded in the States. There is no hard news yet on how much of the IPO was held by underwriters.

Here is their website for the Sprott Physical Gold Trust, and the link to their NAV financials. Here is a link to the prospectus.

As you can see, there is still some key information missing. The cash assets less expenses of the trust are not yet listed. And more importantly, the trust lists only 13,686 ounces of gold owned, with a market value of approximately US$15 million.

According to the prospectus, the fund will store its gold in Canada, is based in Ontario, but will calculating its NAV in US$. It appears to be a closed end fund, where price tracks the NAV, and not an ETF which tracks the price of some external instrument like an index or spot prices.

If the trust has sold all its units listed as outstanding, they are in a cash position of approximately $390 million. I do not not know if the underwriters are holding any inventory. Their prospectus commits them to holding 97% of their assets in London Ready gold bars. And they are only listed $15 million in current gold assets.

Nine out of ten Americans might notice that the Sprott trust needs to buy gold in the size of most small central bank purchases, if they have not secured delivery already. And again according to the Prospectus, the trust does not traffic in paper and derivatives.

I am more familiar with trusts and funds taking an incremental approach in their bullion purchases, and the negotiation for delivery before the units are sold in size. I am not sure what the case is here. It obviously is worth watching. Spot gold has risen quite a bit since last Friday. There is not enough data to suggest a correlation. However, if the entire IPO was placed, and the current gold holdings on the web site are accurate, they need to acquire almost 10 tonnes of quality physical bullion.

Above and beyond the short term interest in potential physical gold buying pressure, the Trust has some promising innovations in terms of holdings and transparency as compared to some other similar funds.

What I found personally appealing, subject to details, is the ability for individual unit holders to redeem their shares for delivery in as little as one bar of London Ready bullion, at the NAV but subject to delivery fees. This will obviously have its appeal for those who wish to add bullion for retirement accounts, with an eye to taking physical delivery at some point without incurring storage fees which can be significant over time.

I will leave the detailed analysis of this trust to more capable people who specialize in analyzing ETFs and Trusts. I know some ETF writers are working on this as more details become public. It is not really my area of recent knowledge, and I have to admit that the IPO completely escaped my attention, although I did know it was coming some months ago.

5 Comments – Post Your Own

#1) On March 02, 2010 at 2:41 PM, Tastylunch (29.20) wrote:

Wouldn't buying Gold be better than buying  PHYS in this case though Binve?

I know I'd rather buy what someone has to buy  so I have guaranteed buyer than buy inbto the forced buyer in most situations. if you catch my drift.

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#2) On March 02, 2010 at 3:07 PM, binve (< 20) wrote:

Tasty,

I do catch your drift :). But I think the appeal for PHYS is that it is a hybrid vehicle. It offers physical backing and physical redemption, but is more liquid than physical gold. It would be for the same reason somebody owns CEF.

I own gold in several forms (physical, CEF, and GSMs) and might consider PHYS as a companion investment to CEF. 

But I don't think any serious investor would consider any of these an "either-or" proposition.

Just my take at any rate :) Thanks man!

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#3) On March 03, 2010 at 11:09 AM, USNHR (31.60) wrote:

they need to acquire almost 10 tonnes of quality physical bullion

What would the purchase of 10 tons of gold do to the price per ounce in the world market? Would it affect it? 10 t(US) = 320,000.001 oz. Thats a lot of ounces to come up with isn't it? Of course if we talk of 10 metric tons or 10 long tons (UK) then it is more.

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#4) On March 03, 2010 at 1:11 PM, jesusfreakinco (28.78) wrote:

binve,

Can you elaborate on the convertibility to physical gold for CEF and PHYS so I don't necessarily have to read through the entire prospectus of both?  What are the pros/cons over holding gold in your greedy little hands?  

Thanks!

JFC

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#5) On March 03, 2010 at 1:16 PM, binve (< 20) wrote:

USNHR,

It would be a small blip in the grand scheme. Mine output is in the thousands of tonnes range (gold is commonly measured in metric). But the fact that it is a physical fund in the world paper gold and derviatives is the interesting part

jesusfreakinco

Hey JFC!. Sorry, I have not read the PHYS prospectus yet, only what Jesse mentioned above regarding convertability. But as far as I know, CEF has no convertability option. I hold because it is backed by physical and rigorously audited. GLD, not so much :)

Thanks!..

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