FG Trade Latin
FG Trade Latin
The Sprott Physical Gold and Silver Trust (NYSEARCA:CEF) is a closed-end fund that invests in gold and silver. The metals are fully allocated for and held at The Royal Canadian Mint. Typically, the mix is around 2/3 in gold and 1/3 in silver.
I first covered CEF almost a year ago here, which is a good place to start for those not familiar with the fund. Key facts include a MER of 0.49%, and a redemption feature allowing exchange for the physical assets. The exchange feature assists in CEF being unlikely to trade at large discounts to NAV like often occurs with other closed end funds. Currently, though, CEF is at a modest 5% discount. This discount, along with the features mentioned, I view as an attractive way to get exposure to gold and silver.
I was bullish on CEF this time last year, yet it has only risen a couple of percent since my article back then. Over the last year, precious metals have been lacking the impetus of Fed rate cuts to prompt a break into a new higher range.
Last year started promising for the sector. Gold still had good returns for calendar 2023, although silver was basically flat.
CEF factsheet at Sprott Homepage
Last year all the attention of investors was on the great returns from the S&P500, Nasdaq and Bitcoin instead.
Now we may be getting close to the Fed rate cutting cycle. Despite the uncertainty over this, gold has just hit new record highs. At the same time, there is very little fanfare about this. This means plenty of room for investors who are underweight precious metals, to suddenly become aggressive buyers.
Let’s examine numerous signals suggesting very low interest in the sector, resulting in a bullish set-up for when this eventually changes. An unusual scenario given gold has just hit fresh all-time highs.
It is difficult for precious metals to win over investors’ attention when global funds are so fixated about performance risk and US equities exposures.
Topdown Charts, LSEG, Federal Reserve FoF data
Foreign investor’s allocation to US equities last hit this sort of extreme around the time precious metals were commencing a massive decade long bull cycle.
Another asset that has captured investors’ attention over the last year again and flirting with record highs is bitcoin.
It has long been compared with gold, and the amount of flows it has been capturing in recent times has been staggering.
Last month, this trend reached fever-pitch levels. Despite only getting going this year, US based Bitcoin ETFs are already reaching half of Physical Gold ETFs in the US.
VettaFi, U.S. Global Investors
One can only imagine if the flows towards bitcoin cool off to some extent soon, the potential turnaround in gold ETF flows that we may see.
Despite gold now hitting new highs, 2024 began with continued outflows. The World Gold Council reported that “Global gold ETFs kicked off 2024 with the eighth monthly outflow, led by North American funds.”
Of course, the bitcoin bulls may argue this relative flows trend will continue. Without making this article entirely a gold v bitcoin debate, I would just point out bitcoin’s correlation with the Nasdaq in recent years.
Topdown Charts, Refinitiv
For those investors more cautious on the Nasdaq going forward, CEF may be more suitable for portfolios from this point in time.
Further evidence of lack of bullishness for precious metals is that gold open interest has collapsed to the lowest level in more than 5 years.
Macleod Finance
The significance of the above chart is this is the first time open interest has collapsed so low since gold hit the $2,000 level in 2020. To quote from the above article, “Preliminary figures for yesterday are 412,506 contracts, the lowest in four years. In fact, it is the lowest since December 2018 when gold was sold down to under $1200. The level of disinterest today is similar to then, which preceded a 20-month bull phase taking the price to $2074.”
The silver price has continued to lag the price of gold in recent years. If gold can attract a few more headlines of consolidating its new highs well above the $2,000 level, this should attract more attention to silver.
The almost one third allocation to silver that CEF holds, makes it an efficient way for an investor to get an appropriate exposure to both gold and silver.
To elaborate on this point, I encourage readers to refer to the latest CEF factsheet, where it lays out such efficient reasons to own it.
Here is a quick summary:
CEF factsheet at Sprott Homepage
Silver looks primed to mean revert with the historical relationship to the gold price, implying silver is cheap in comparison.
It is not too difficult to imagine the gold / silver ratio moving towards the 65 area on the below chart. That would imply a silver price of some 40% higher than current levels, in a scenario that the gold price was unchanged.
goldprice.org/gold-price-charts/all-data-gold-silver-ratio-history
Of course, one could simply invest in silver only, in the hope of capturing greater upside potential. There are no guarantees that this relationship mean reverts, however, and getting the timing right also is challenging. Gold and silver also have various different drivers of price movements; hence, I view CEF as a good balance for a portfolio to be exposed to both.
This article offers a reasonable explanation of why silver underperformed gold in 2023. Central bank buying has been more prominent in holding up the gold price last year despite other headwinds.
Despite that, I see it as prudent in also maintaining some silver exposure in one’s portfolio. The longer-term demand / supply dynamics still look favorable as the above article notes. Another noteworthy factor from this article is how silver can suddenly spike and outperform gold in certain scenarios. To quote, “Since silver trading is a thinner market, its price can and does move up or down by a greater percentage than gold. Therefore, if any major world calamity erupts, demand for bullion-priced physical silver could skyrocket almost instantly—as we saw early in the pandemic in 2020 and in March 2023.”
For this reason, I see silver as a good risk / reward portfolio diversifier in an increasingly uncertain world.
Finally, some other quick observations on the bullish setup for precious metals. That is, no excitement that one might normally associate with an asset class breaking to new highs.
Where I could be wrong on my bullishness here, is most likely a similar scenario from my last article on CEF almost a year ago.
What transpired since then could be described as financial markets embracing the “soft landing” or “goldilocks” economic scenarios. If this sentiment continues, like from the last time I covered CEF, there may well be better gains to be had elsewhere in other asset classes.
The difference to then however is many “risk on” assets such as US equities and bitcoin, have already performed superbly well. Arguably, such great performance has been in part to already pricing in such soft landing expectations.
In the event that the US economy matches these expectations, there could easily be some disappointment if the Fed does not cut rates as much as markets are hoping for.
In this scenario, we may also see weakness in CEF, but it may not be as vulnerable. It has not risen anywhere near as much as other assets attracting all the media attention. Gold is now looking more resilient on the back of safe haven type buying, in particular from overseas central banks.
Large US tech stocks and bitcoin are capturing all the attention as they reach record highs. Gold is doing so “quietly”, and silver has good potential to follow. CEF remains an attractive buy to capture further upside in the price of gold and silver in 2024 as this story attracts more headlines.
FOMO investing has already been playing out in other asset classes and there is the potential in the future to see it in gold and silver. If so, there seems to be a lot of investors sitting on the sidelines, that can soon turn into future buyers of precious metals.