Embry touts new gold trust, bullion buying

If you’ve got a lot of money or even just a little, John Embry, chief investment strategist for Sprott Asset Management, says you’d better hold some of it in physical gold.

Although the gold guru himself holds 75% of his personal portfolio in gold — one-third bullion and the rest in gold miners and explorers (that doesn’t include his sizeable Sprott investment) — he says an ordinary person should hold 20% of his or her investments in gold.

“Quite frankly, I personally have a much higher percentage but I can’t, as a professional, recommend that because if you recommend too high of a number people may think you are nuts,” Embry says. “But trust me, the one thing I own that I don’t worry about is gold.”

In the past, many people found gold to be cumbersome, costly and complicated but in recent times gold has become more accessible. Products like exchange-traded funds (ETFs), pool accounts and gold certificates have solved those problems but for the more traditional, there are still bullion coins, wafers and bars.

Sprott Asset Management has recently created the Sprott Physical Gold Trust (PHY. U-T, PHYS-N), a new exchange-traded vehicle for investors looking to hold bullion without the hassles of logistics, storage, fees and insurance associated with holding bullion on your own. But unlike the other gold-backed ETFs, where you can only cash in your holdings for, well, cash, with the Sprott Physical Gold Trust investors can actually take physical delivery of the metal. And yes, Sprott will deliver wherever you please, but you must be a high-net-worth investor.

“The one caveat is that it has to be in the size of a London Good Delivery bar and they are 400 oz. so you are talking half a million bucks,” says Embry.

This isn’t Sprott’s first goldbacked fund. In 2003, Sprott teamed up with North America’s only publicly- traded bullion fund, Central Fund of Canada (CEF. A-T, CEF. U-T, CEF-X), created in 1990, to form a second fund, the Central Gold Trust (GTU. UN-T, GTU. U-T, GTU-X), which Embry co-chaired until the new Sprott trust came out.

(There are many other goldbacked ETFs not connected to Sprott, the largest being SPDR Gold Shares [GLD-N] with nearly 42 million oz. gold, which is currently valued at US$51.2 billion.)

Seven years ago, when Embry went to market the Central Gold Trust, he was surprised at the lack of enthusiasm for buying physical gold.

“The response was subdued, to put it mildly, but at least we got it into the market,” he recalls, noting, “We didn’t raise nearly as much money.”

The initial public offering (IPO) of the Central Gold Trust was $46 million (it’s now worth US$567.5 million), while Sprott Physical Gold Trust’s IPO totaled US$442.5 million.

The IPO for the new trust consisted of 44.25 million units at US$10 apiece. That was in March. By late May, Sprott issued a “follow- on offering” that raised gross proceeds of US$279 million.

The Sprott Physical Gold Trust now has total net assets of US$727.4 million with gold bullion holdings amounting to US$708.2 million or 574,173 oz. gold. There are 69.1 million units outstanding priced at US$11.68 apiece, a 10.8% premium on the US$10.53 net asset value per unit.

There’s a chance for further increases in gold holdings, but only if there’s enough of a premium so existing unit holders won’t be diluted.

Embry says investors should only invest in allocated gold funds and should watch out for those that might be unallocated vehicles, where a gold-backed fund doesn’t actually hold gold of equal value to the fun in a vault.

“If something went horribly wrong you may not end up owning what you think you own,” he says. “I can almost guarantee you that a lot of these gold-pooled accounts and gold certificates, the gold that is allegedly backing them is not in the vault.”

Embry says the reasons to own gold haven’t changed since 2003, when the Central Gold Trust came out.

Gold has been used as a safe haven for ages. It can help protect a portfolio from inflation, stock market crashes and currency devaluation, because it holds its monetary value.

“I would say the environment for people to buy gold is more obvious than it was seven years ago,” he clarifies.

But even with the increasing demand for investing in physical gold, Embry says there is still a lack of conviction.

“European buying for physical gold is going off the chart. It’s start- ing and I think that if something were to go seriously wrong with the U.S. stock market or the U.S. currency for that matter, I think both are going to happen at some point, and that would bring more and more people into gold,” Embry says. “We’ve barely scratched the surface.”

Embry feels that the value of paper money is at a severe risk because the “insoluble debt problems in virtually every Western country.”

“Six months ago, Greece wasn’t on the radar and now it’s a catastrophe,” he says. “These things can melt down very quickly.”

He sees gold reaching US$1,500- $US1,600 per oz. by the end of 2010, but he doesn’t like to forecast too far into the future. He says he holds off on flipping out numbers like US$3,000 or US$5,000 per oz. because it sounds crazy when it’s taken out of context.

“I will say one thing without any fear of contradiction. Gold will never, ever trade below US$1,000 an ounce again. Ever. In history.”

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TO BUY OR NOT TO BUY BULLION

NO
Eric Kirzner, author and professor at the Rotman School of Business, University of Toronto.

“I stopped being a gold bug a long time ago. Going through the stag-flationary ‘70s, I did believe in gold as a necessary part of a portfolio. I think there are better ways to protect yourself against inflation and turmoil… It’s the asset allocation that really matters. If you think that 5-8% of your portfolio should be allocated to gold, I’m not going to quarrel with you but if it’s 30%, I am going to quarrel with that. If I was really, really worried, I’d rather hold T-Bills and government bonds.”

NO
Ted Rechtshaffen, president and CEO, Tridelta Financial, Toronto.

“I understand it but I don’t recommend it… Unless you came from a country that had a very unstable government and banking system, most people haven’t gone to the level of ‘I need to have physical gold in case the world collapses,’… If we are really nervous, we put it in cash. There is always the fear, I guess, that if you put it in cash, the bank could go bankrupt, but we have so many life issues, there’s only so much we can worry about.”

YES
Jeffrey Christian, managing director of CPM Group, a precious metals and commodities research, consulting, asset management and investment banking firm in New York.

“Like a lot of higher income investors and high-net-worth investors, I own physical gold. I also have some long beta out-of-the-money call options and a range of gold equities that I invest in – some major gold producing companies and some smaller exploration companies… Gold actually has done pretty well as an investment. There are long periods of time where everybody’s laughing at the people who hold gold and then gold sprints ahead and everything collapses.”

YES
George Milling-Stanley,  manager of gold market analysis, World Gold Council, New York.

“I have exposure to gold in my portfolio in a variety of ways. I have small bars and coins and ETFs… I’ve always believed it’s a good idea to have some exposure in a portfolio.”

YES
Jon Nadler, senior analyst at Kitco Bullion Dealers in Mo
ntreal.

“It’s good to have your gold. We advocate 10% as a life insurance position in your portfolio but people go overboard and that’s when it creates these mushroom clouds in physical bullion land.”

YES
Frank Basa, president and chairman of Gold Bullion Development (gbb-v), a Canadian based exploration, mining and processing company.

“I try to stay away from cash as much as I can… Even the company I work for right now, I am paid in gold…  When I need money I sell gold and put it into a Canadian account and get money from an ATM.”