Sprott Physical Gold Trust: Patience Will Be Rewarded From Here

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PHYS has outperformed the S&P 500, appreciating over 30% in seven months, showcasing Gold's safe haven status.Despite declining ETF demand, Gold prices have risen, driven by central bank purchases, ...

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EyeEm Mobile GmbH/iStock via Getty Images In the seven months since I last covered the Sprott Physical Gold Trust (NYSEARCA:PHYS), returns have been plentiful. In fact, since that piece was published shares in the fund have appreciated by over 30% against an S&P 500 that has grown by just under 13%. The chart below shows the total return of PHYS vs the SPDR S&P 500 ETF Trust (SPY) since the time of my prior Sprott note: Data by YCharts I think this chart tells two stories. First, Gold (XAUUSD:CUR) and by proxy PHYS have simply outperformed the index to a staggering degree. The second, is that PHYS has often increased in spite of SPY declines. This would seem to imply that Gold is living up to its reputation as a safe haven asset. With such a terrific run for PHYS through the first three quarters of the year, is now the time to start locking in some of the gain?  Demand For Metal In some of my previous Seeking Alpha articles, I've noted how demand for Gold via ETF products has been dropping over the last two years. In my view, it has been remarkable that the price of Gold has continued to rise in spite of ETF net outflow. More recently, ETF demand for the yellow metal has started to come back around:   Gold ETF Demand (World Gold Council) ETF flows flipped back to positive in May after 11 straight months in decline and 21 out of 24 negative months between May 2022 and April 2024. ETFs are obviously starting to come back a little bit here but we’re still well off pre-Russia/Ukraine highs for supply held in these products. Recall where the demand has generally been coming from:   Gold Bar Investment (World Gold Council) Physical bar investment demand has been flat for essentially a decade with roughly 800 tonnes annually being the average over the last three years. 2023 was under this figure. Then there's jewelry:   Jewelry Consumption Demand (World Gold Council) At just 390.6 tonnes, Gold demand from jewelry consumption was the lowest since COVID in Q2-24. This intuitively makes sense because as prices rise, we see demand decline. Not shown in any of these charts; technology demand for Gold for things like electronics and industry has generally been in decline for the last decade. The biggest driver of positive demand over these last two and half years has been the central banks:   Central Bank Demand (World Gold Council) This probably doesn't come as much of a shock to those who have followed my work here on SA for the last several years, but I suspect foreign central bank demand has quite a bit to do with the relative lack of attractiveness of holding US debt as interest expense on the debt goes parabolic.   Interest Expense on Public Debt (FRED) To me, it’s the only thing that explains seven straight months of virtually straight up for Gold prices. But, we need to remain mindful that the trend in quarterly buying from central bankers appears headed down. The 183.4 tonnes of net buying from central banks in Q2-24 was the lowest quarterly figure in a year. While it's fair to point out that first half net buying in 2024 was 23.5 tonnes higher than that of 2023, it's well off the buying pace from 2022.  We’ll get a better sense for how Q3 demand shakes out soon. But it’s possible that supply coming back into ETFs is simply retail traders trying to front run more central bank purchases that simply aren’t going to be there. To be perfectly clear, that is entirely a guess on my part until we have updated data. So take that for what it's worth to you. PHYS NAV Rate Getting back to PHYS specifically, the Sprott Physical Gold Trust generally trades at a discount to net asset value. Given that, I made the argument that buying PHYS was a more efficient way to buy Gold versus something like the SPDR Gold Shares ETF (GLD) or even physical Gold. I'll touch on the latter in a moment. But first the NAV rate: Data by YCharts When I covered PHYS in February, the discount to NAV was closer to 2% than current levels. A 1.4% discount is certainly nothing to sneeze at. Especially when GLD trades a small premium to NAV. But investors should keep in mind that these NAV rates can be volatile and it isn't out of the ordinary to see PHYS trade at a larger discount when there is greater price pressure on the metals market.  Something that came up a couple times in the comments section of my February PHYS piece was the tax implication of owning PHYS in US-based accounts. I'm not a tax expert so I'd encourage anyone who has those kinds of concerns to discuss it with a tax professional. My personal exposure to PHYS is through an IRA. I don't look at PHYS as a replacement for real physical metal. I view it as a proxy for Gold in a traditional investment account. I do this for the ease of acquisition and the liquidity of the fund. PHYS can't replace physical in your hand, in a safe, or buried in the backyard. But PHYS remains my preferred way to buy Gold with investment account capital. Risk to Consider: Gold vs RE Since Gold doesn't provide earnings or yields, a decent way to value the metal is against other real assets. If we look at Gold against real estate, we get a current reading of 217 ounces to buy a typical residential home.    Home price index to Gold (LongTermTrends.net) The last time this ratio went below 200 ounces was August 2020 when Gold was $2,070 per ounce. This served as a short term top for Gold and a 20% pullback ensued over the next two years. Again, we're not under 200 ounces yet, but we're far closer than we were at the beginning of the year. Gold doesn't need to decline for this ratio to go back up. Frankly, the Federal Reserve lowering interest rates by 50 bps in September could be a sign of continued declines in mortgage rates as we head into 2025. A lower cost to finance could conceivably raise prices for houses and increase the home price to Gold ratio. Thus, indicating more upside for Gold even if the ratio stays flat. Closing Thoughts  In my opinion, Gold - and by extension PHYS - will continue to rise for the next several years. I don't think this bull market in precious metals is remotely close to over. What I will say is after such an enormous run in a multi-trillion dollar asset, it might be wise to realize some of the gain if you've been a PHYS holder for the last few years. If one is just now joining the party and is still building a position from nothing, I think patience is warranted at this juncture. I'm downgrading PHYS from 'strong buy' to 'buy.' I've personally taken a very small portion of my position off. I intend to buy it back at a lower price in the weeks/months ahead. But that is admittedly just the swing trader in me. As a long term store of value asset that accounts for currency debasement, the fundamental setup for Gold remains very strong.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2473971634"}