Latest Sprott Offering Proves Paper and Physical Gold Prices Are Not Decoupling Yet

We’ve been through this before, but things can change, so it’s always a good idea to check and see if perhaps maybe, just maybe, “physical” gold prices and “paper” gold prices are decoupling.  If you’re scratching your head and asking yourself “Kid Dynamite, WTF are you talking about, there are no separate “physical” and “paper” gold prices,”  well, yeah – that’s my point – but there is a whole segment of the population who hasn’t yet had that epiphany: they’ve been told that if one wants to buy sizable amounts of physical bullion, one has to pay much more than the “paper” price on the screen.  Let’s go to the data…

Sprott Physical Gold Trust ($PHYS – no positions) priced a secondary offering this morning.  The Trust sold 23,000,000 shares at a price of $14.84.  After the underwriters’ concession, the net cash to the Trust was $14.2464 per unit.

Now, if we take the pre-secondary data, and compare it to the post-secondary data, we can approximate the price that the Trust paid for its new gold purchases today.

Here’s the “before” picture – the NAV snapshot as of the close on 9/6/2012:


and here’s the “after” as of the close on 9/7/2012:


So, following the recipe I laid out in the prior posts on this subject:

We know how much cash the Trust had before the offering.

We know how much cash the Trust raised in the offering.

We know how much cash the Trust has after the offering  – after their initial gold purchase.

So we know how much cash the Trust spent on their gold.

We know how many ounces of gold the Trust bought, so we can back into the price per ounce.

There are some small daily Trust fees that I’m leaving out of this analysis for simplicity.

After doing the math, the purchase price works out to $1728.93 per ounce.  Roughly.  So let’s look at the intraday “paper” gold price from Kitco for today, noting that this secondary offering priced around 10am:

As you can see, this “physical” gold purchase was done at prices in line with the then-prevailing “paper” gold price.

Paper and physical gold prices are not decoupling yet.  Q.E.D.

Astute readers may notice some other interesting tidbits here, such as “Why on Earth would Eric Sprott do a secondary offering the morning of a jobs report, thus exposing his Trust to massive execution risk?”   Or perhaps “The prior night’s closing NAV for PHYS was $14.26.   The net cash received by the Trust in the offering was less than that – isn’t that a violation of the prospectus?”

I will address these issues in a future post – they are weaknesses of the closed end fund structure compared to the exchange traded fund structure.


Paper and Physical Gold Prices are Not Decoupling Yet

Paper and Physical Silver Prices are Not Decoupling Yet


no positions in $PHYS or $GLD

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