Sprott Physical Gold Trust

Moat: 1/5

Understandability: 1/5

Balance Sheet Health: 5/5

Sprott Physical Gold Trust is a closed-end trust that invests in unencumbered physical gold bullion. It provides a convenient way for investors to gain exposure to gold prices without owning physical gold themselves.

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: PHYS operates as a closed-end trust, meaning it does not issue new shares or redeem existing ones on a regular basis, unlike open-end funds. Instead, shares trade on the stock exchange like any other stock. The Trust’s primary goal is to provide a secure and convenient way for investors to own gold, and therefore, its strategy is quite simple, buying and holding physical gold bullion. Unlike many investment vehicles, PHYS does not engage in derivatives trading or lending, and it holds all of its assets in allocated, fully-insured gold bullion. It has to be noted that PHYS is not a “gold mining company” and it will only produce returns according to the price fluctuation of gold metal itself, and not according to its operational expertise or other such factors.

Revenue Distribution & Trends: PHYS doesn’t actually generate revenue in the way a traditional company would. Its primary source of value is linked directly to the spot price of gold. Instead of revenue from sales, the value is determined by the Net Asset Value (NAV) of the gold it holds as the gold price changes. Therefore, no revenue distribution is applicable.

  • Recent Trends: Gold has historically been seen as a safe-haven asset during times of economic uncertainty and market volatility. Over the past several years, it has experienced varied price movements, partly due to increased volatility, and has made the metal very attractive to investors at certain points of time, while making it seem like a loss during other times. In recent periods there was an increase in global geopolitical risk, which positively influenced the price of gold and thereby its attractiveness. It will always be important for investors to look at gold price in terms of longer cycles.
  • Margins: Since the fund is not a regular business, margins do not really apply. The expense ratio (management expenses) was 0.41% in the most recent 6-K report. The only other expenses for it are directly related to gold storage and insurance costs, which are a very small percentage of total assets, hence margins are not the most important metrics for analyzing this company.

Competitive Landscape: PHYS operates in a competitive environment. It competes with other physical gold trusts, gold ETFs, gold-backed products, futures trading and owning the metal itself. Key competitors are:

  • Other ETFs and Trusts: Many different ETFs and trusts exist that claim to represent the value of gold metal, however these may not have the same level of transparency, security, and liquidity as PHYS does. Also some have less secure storing methods.
  • Futures Trading: Many investment vehicles exist for investing in gold price, such as futures. However these are usually speculative in nature and offer more risk than just holding physical gold bullion.
  • Physical Gold: This is the most direct competitor for PHYS, and the investor can choose to buy physical gold and store it themselves. However this can be cumbersome and the investor would need to take care of security and liquidity, which PHYS provides conveniently.

What Makes PHYS Different:

  • Physical Gold Backing: PHYS holds unencumbered physical gold, offering investors a more transparent way to gain exposure to gold compared to other products such as gold ETNs or ETFs, that invest through futures and contracts. Many investors feel more comfortable knowing that the money that they put into gold investment, is tied directly to gold bullion itself, which provides a sort of security.
  • Transparency and Security: PHYS’s gold is held by a reputable custodian in allocated storage, and it offers investors transparency and comfort, regarding gold security. It has also been audited by the SEC to ensure transparency and security, which is a plus.
  • Tax-Efficient Structure: PHYS is taxed as a passive foreign investment company under the US tax code, and if held in a taxable account for the required holding period, the gains are taxed at capital gain rate.
  • Liquid & Convenient: PHYS shares trade on the stock market, offering investors the benefit of liquidity and convenience, allowing investors to buy/sell as much as they want and as often they want.
  • Simplicity: PHYS’s strategy is incredibly easy to understand, and requires practically zero analytical effort to understand the business plan.

Recent Concerns & Controversies: There have been no significant controversies or problems related to Sprott Physical Gold Trust. It’s a straightforward investment product with a transparent business model. That being said, some critics say that using PHYS as a method of storing wealth, or as a safe haven asset during difficult market times is futile and an underperforming option, and it would be best to just directly buy the gold or buy different types of investment opportunities.

  • No Direct Earnings: The most obvious con of this investment option is the fact that it does not generate dividends or other income, it just aims to match the price performance of gold. So for investors that are looking to earn income, PHYS is not a suitable investment option.
  • Gold Volatility: Gold is known for its volatile prices that can sometimes drastically swing in a relatively short period. So if an investor uses this as an investment vehicle, it could also lose value drastically in short time periods.
  • Management Fees: Although relatively small, management fees are also a factor that influences the returns of the fund, and they do not add any additional value.

Financials In-Depth:

  • Balance Sheet Health: PHYS has a very strong balance sheet health due to its assets consisting solely of gold bullion which is a highly liquid asset. This makes the balance sheet almost risk free.
  • Income Statement Analysis: The income statement is simple, as the company doesn’t generate revenue from selling a service or a product, and their costs are predictable (insurance, storing, and administrative expenses). Net income is non existent and it is only a pass-through entity that will provide value according to changes in gold price.

Moat Rating: 1/5 PHYS has practically no moat due to it simply holding gold and providing liquidity to trade in it. It has no moat in a sense that it is a unique business that is very hard for competitors to replicate, since its business plan and process are incredibly straightforward and easily replicable.

Understandability Rating: 1/5 The business model is incredibly simple to understand and does not require any specialized knowledge. Any investor who knows what a gold bullion is, would easily understand how the company operates and how it derives its worth.

Balance Sheet Health Rating: 5/5 PHYS’s balance sheet is extremely healthy. Its assets are composed entirely of fully secured and unencumbered physical gold, making it very low risk. It has zero debt.