Sprott Physical Gold and Silver Trust

Moat: 1/5

Understandability: 1/5

Balance Sheet Health: 5/5

Sprott Physical Gold and Silver Trust is a closed-end trust that invests solely in physical gold and silver bullion, held in secure storage.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Sprott Physical Gold and Silver Trust (PHYS) is not a traditional operating business. It’s a closed-end trust that holds physical gold and silver bullion as its primary assets. This means the Trust’s revenue is primarily from the change in value of gold and silver.

  • Revenue Distribution: The trust’s revenue directly mirrors the appreciation or depreciation of the gold and silver it holds. They make no operating profits, just gains when the prices of the precious metals rise. There are no recurring sales or services that this company sells.
  • Industry Trends: The gold and silver markets are influenced by a myriad of macroeconomic factors, such as interest rates, inflation, currency fluctuations, and overall economic uncertainty. Demand for physical metals rises as people search for a safe haven for wealth in times of uncertainty, rising interest rates and high inflation. While the overall demand for the metals can fluctuate as well.
  • Margins and Competitive Landscape: There is no true competition for Sprott Physical Gold and Silver Trust, as it offers a way for investors to hold physical gold and silver through shares. They don’t compete with other businesses in any traditional way; their returns are solely linked to the performance of the metals. The margins are also almost non existent, as operating costs are usually small.
  • What Makes the Company Different: This is an extremely straight-forward vehicle for investing in physical precious metals through stock purchase. Their value solely tracks the value of physical metals. Therefore, the company itself is not the driver of returns or performance.

Moat Assessment: 1/5

Moat Rating: 1/5. This company does not have an economic moat. It’s a simple investment vehicle which does not hold patents, it is not differentiated and provides a commodity product. There are alternatives, both for institutional and retail investors, to acquire gold and silver, such as direct purchase, mutual funds, ETFs, or other trusts. This does not provide any edge to the company itself.

  • Intangible Assets: Sprott Physical Gold and Silver Trust does not have any meaningful intangible assets that provide a competitive edge. The trust is simply a vehicle for investors to gain exposure to gold and silver.
  • Switching Costs: There are no switching costs for investors.
  • Network Effects: The trust does not benefit from network effects.
  • Cost Advantages: There are no particular cost advantages that give this company any kind of competitive advantage.

Risks to the Moat and Business Resilience

The main risk to this investment vehicle comes directly from the changes in value of gold and silver. A decline in demand for precious metals, a change in preferences of investors, and a decrease in investment in precious metals will negatively impact the companies value and viability.

  • Volatility: The market for gold and silver can be very volatile. The company is completely at the mercy of changes in those markets.
  • Market Sentiment: Changes in the global economic situation, geopolitical events, inflation rates, and currency fluctuations can all impact the prices of precious metals.
  • Lack of Control: Management has little control over factors that influence price, and therefore little control over the company’s success.

Financials

  • Income Statement PHYS does not have a traditional income statement. Their “income” is solely tied to changes in value of the assets. All expenses are considered operating expenses, there is no other source of profits.
  • Balance Sheet PHYS’s balance sheet is primarily comprised of gold and silver bullion, which are the primary asset, and a small amount of liabilities. This shows a very safe financial picture for the company. It is rated 5/5 for balance sheet health because of the extremely low risk.
  • Cash Flow: The company does not have meaningful cash flows other than from selling shares and from increases in value of the metals.

Understandability: 1/5

Understandability Rating: 1/5. This is a very straightforward business to understand. It holds physical metals that are easily priced and the company’s value directly reflects their market price. There are no complex aspects of the business.

Balance Sheet Health: 5/5

Balance Sheet Health Rating: 5/5. The company’s balance sheet is extremely strong. The trust holds physical gold and silver assets which are easily convertible into cash and has minimal liabilities. This is an extremely healthy balance sheet as there is little risk of asset write-offs. It’s simply a vehicle for investors to own the physical assets.

Recent Concerns and Controversies

  • The recent concern of this company has been the price of silver, and how it declined recently. These declines have negatively impacted the value of Sprott Physical Gold and Silver Trust.
  • There have been some accusations that the company is trading at premiums over its Net Asset Value (NAV). However, those premiums are not always a clear reflection of the business, and premiums often fluctuate, based on external factors.

Conclusion

Sprott Physical Gold and Silver Trust is a highly liquid way for investors to get exposure to gold and silver markets through stock. The biggest drawback is a lack of competitive advantage and therefore limited ability to create a lasting, sustainable moat. The balance sheet is pristine, but the returns on investment are tied directly to the fluctuations in price of the commodities.