Let's Get Physical = Sprott Physical Gold Trust
Matthew T. Schroeder
Dec 14, 2009
Sprott Asset Management
Files Preliminary Prospectus in the US for a $ 575 Million Gold
David Einhorn, the President
of hedge fund Greenlight Capital, and fellow prominent hedge
fund manager, John Paulson of Paulson & Co, may soon have
another option for investment in the gold sector, and this time,
it is physical.
Paulson has recently made news
with his substantial holdings in SPDR Gold Trust (GLD), AngloGold
Ashanti (AU), Gold Fields (GFI) and Kinross Gold (KGC). Einhorn
is also betting on gold via the Market Vectors Gold Miners ETF
(GDX) and Barrick Gold (ABX), and reportedly also owns a large
amount of physical gold.
Now, a new product may be coming
to both the New York Stock Exchange (NYSE) and the Toronto Stock
Exchange (TSX) which will give them, and other investors, access
to physical gold bullion.
On December 8th, Canadian money
management firm Sprott Asset Management, which manages approximately
$4.4 billion in assets, filed a preliminary prospectus (Form
F-1) with the US Securities and Exchange Commission for a US$
575 million initial public offering (IPO) of the Sprott Physical
Gold Trust. The Sprott Physical Gold Trust would exclusively
hold physical gold bullion. The trust plans to list on the NYSE
under the ticker “PHYS”, and on the TSX under the
ticker “PHY”. The initial public offering price is
expected to be $10.00 per unit.
Some specifics of the fund
according to the prospectus include:
- The Trust was created to invest
and hold substantially all of its assets in physical gold bullion.
- The Trust seeks to provide
a secure, convenient and exchange-traded investment alternative
for investors interested in holding physical gold bullion without
the inconvenience that is typical of a direct investment in physical
- The Trust intends to invest
primarily in long-term holdings of unencumbered, fully allocated,
physical gold bullion and will not speculate with regard to short-term
changes in gold prices.
- The Trust does not anticipate
making regular cash distributions to unitholders.
- Sprott Asset Management LP
is the sponsor of the Trust and serves as manager.
According to the prospectus,
the advantages of the fund include the following:
- Convenient Way to Own Physical
Gold Bullion: The units
will trade on the NYSE and the TSX and will provide institutional
and retail investors with indirect access to the physical gold
bullion market while providing them with the liquidity of an
exchange traded security. The units may be bought and sold on
the NYSE and the TSX like any other exchange-listed securities.
- Investment in Physical
Gold Bullion Only:
Except with respect to cash held by the Trust to pay expenses
and anticipated redemptions, the Trust expects to own only London
Good Delivery physical gold bullion. The Manager intends to invest
and hold 97% of the total net assets of the Trust in physical
gold bullion in London Good Delivery bar form. The Trust will
not invest in gold certificates or other financial instruments
that represent gold or that may be exchanged for gold.
- Lower Transaction Costs: The Manager expects that, for many
investors, costs associated with buying and selling the units
in the secondary market and the payment of the Trust's ongoing
expenses will be lower than the costs associated with buying
and selling physical gold bullion and storing and insuring physical
gold bullion in a traditional allocated gold bullion account.
- Ability to Redeem Units
for Physical Gold Bullion:
Unitholders will have the ability, on a monthly basis, to redeem
their units for physical gold bullion for a redemption price
equal to 100% of the NAV of the redeemed units, subject to certain
conditions and less certain expenses related to administrative,
delivery and redemption processes.
- Storage at the Royal Canadian
Mint: The Trust's physical
gold bullion will be fully allocated and stored at the Royal
Canadian Mint. The Mint is a Canadian Crown corporation that
operates with the full faith and credit of the Government of
Canada and will be responsible for and bear the risk of loss
of, and damage to, the Trust's physical gold bullion that is
in the custody of the Mint. The physical gold bullion will be
subject to periodic inspection and audits.
- Potential Tax Advantage
For Certain U.S. Investors:
Any gains realized on the sale of units by an investor that is
an individual, trust or estate, including such investors that
own units through partnerships and other pass-through entities
for U.S. federal income tax purposes, may be taxable as long-term
capital gains (at a maximum rate of 15% under current law, compared
to a long-term capital gains tax rate of 28% applicable to the
disposition of physical gold bullion and other "collectibles"
held for more than one year), provided that such U.S. investor
has held the units for more than one year at the time of the
sale and such U.S. investor has made a timely and valid Qualified
Electing Fund, to which we will refer as QEF, election with respect
to the units.
- Benefits of Investing in
Gold: Investment in
gold may provide several benefits to investors. Gold may assist
in protecting a portfolio from inflation, financial collapse
and currency devaluation. Gold has a negative or low correlation
with many other asset classes, making it an effective portfolio
diversifier. In particular, given that gold prices have generally
increased during times of U.S. dollar decline and during inflationary
periods, gold may provide a hedge against purchasing power erosion.
In addition, over the past ten years, gold has outperformed equity
indices such as the S&P 500 Index, the S&P/TSX Composite
Index, the MSCI EAFE Index and the S&P Global Gold Index.
Based on the structure &
advantages outlined above, the Sprott Physical Gold Trust will
likely appeal to institutional investors such as Jean-Marie Eveillard
of First Eagle Funds, who invest in gold because it is like “insurance”.
Disclosure: AI management own
shares in GLD.
Dec 13, 2009
Matthew T. Schroeder
is the President of Anomalous Investments (www.anomalousinvestments.com), an independent, value-added
advisory service focused on findingsmall, undiscovered Special
Situations in the natural resources industry. Particular focus
is on gold, silver, oil & gas and agriculture. He can be reached