Is the Sprott Physical Gold Trust in the Market Trying to Buy 10 Tonnes of Gold?

Something is powering the spot price of gold higher the past few days. Are the Chinese or some other entity claiming the 191.3 tonnes of IMF gold again?

Perhaps relatedly, Sprott Asset Management is involved with a new physical gold bullion trust now trading in the States with the ticker symbol "PHYS."

The IPO for the fund was last Friday 26 February, with a reported 40 million shares outstanding at 10$Cndn. There is no hard news yet on how much of the IPO was held by underwriters. In fact, most of the news on it is a bit dated.

Here is their website for the Sprott Physical Gold Trust, and the link to their NAV financials. Here is a link to the prospectus. This is a link to the stocks' *indicative value* which appears to be its NAV which they use in their premium calculation from their website.

As you can see, there is still some key information missing. The cash assets less expenses of the trust are not yet listed. I have not seen a detailed release on the results of the IPO yet. And more importantly, the trust lists only 13,686 ounces of gold owned, with a market value of approximately US$15 million.

According to the prospectus, the fund will store its gold in Canada, is established in Ontario and is under that jurisdiction, but will be calculating its NAV in US$. It appears to be a trust where price tracks their NAV, and not an ETF which tracks the price of some external instrument like an stock index or spot commodity prices.

The implication is that they will not be selling and buying bullion in relation to market fluctuations as actively as an ETF pegged to spot for example. So the examination of premiums and discounts to NAV will be an issue.

If the trust has sold all its units listed as outstanding, they are in a cash position of approximately $390 million. Are the underwriters still holding any of this inventory? Their prospectus commits them to holding 97% of their assets in gold bars. No certificates or derivatives. And they are only listing $15 million in current gold assets.

Nine out of ten Americans might notice that the Sprott trust needs to buy about 10 tonnes of gold, the size of most small central bank purchases, if they have not negotiated and secured delivery already. According to the Prospectus, the trust does not traffic in paper certificates and derivatives, but in good bullion only.

I am more familiar with trusts and funds taking an incremental approach in their bullion purchases, and the negotiation for delivery before the units are sold. I am not sure what the case is here. It obviously is worth watching. Spot gold has risen quite a bit since last Friday. There is not enough data to suggest a correlation. However, if the entire IPO was placed, and the current gold holdings on the web site are accurate, they need to acquire almost 10 tonnes of quality physical bullion in a market reported to be tight in deliverable quality supply.

And the purchase is large enough so that we ougbt to be able to see an inventory drawdown somewhere. I have heard the buying will be done in London, and not at the Comex. The last purchases of this size were supplied by the IMF directly.

Above and beyond the short term interest in potential physical gold buying pressure, the Trust has some promising innovations in terms of holdings and transparency as compared to some other similar funds.

What I found personally appealing, subject to additional detail, is the ability for individual unit holders to redeem their shares for delivery in as little as one bar of London bullion, at the NAV but subject to delivery fees. This will obviously have its appeal for those who wish to add bullion for retirement accounts, with an eye to taking physical delivery at some point without incurring storage fees which can be significant over time.

I will leave the detailed analysis of this trust to more capable people who specialize in analyzing ETFs and Trusts. I have to admit that the IPO completely escaped my attention, although I did know it was coming some months ago. I had read enough then to know that it met some of my personal needs, based on my holdings and age. I find it more suitable than GLD for example, which seems to be a speculative trading vehicle. I prefer the Trusts like CEF and GTU for some things, and the redemption policy of PHYS seemed to be advantageous even compared to them. But more details are required.

As always perform your own due diligence and if needed discuss your investments with a qualified investment advisor.

Disclosure: I bought some units yesterday despite not feeling comfortable yet about being able to calculate the NAV for myself, and not having some of the details regarding redemptions and the status of their holdings and the IPO. It was some months ago that I read the prospectus. The NAV was indicated yesterday at 9.49 by the company on their site from Friday, which was less than 2 percent premium at yesterday's market price, which is advantageous and more than reasonable for my purposes.

Fed Vice-Chairman Kohn to Retire

I do not think this is anything like a 'principled resignation' from the Fed which we had seen when Larry Meyer and Jerry Jordan resigned. Meyer was a noted inflation hawk, and Jordan was probably the closest thing to an Austrian economist at the Fed. These resignations occurred in 2002, just before Greenspan began to spear-head the monetary reflation that led to the housing bubble and this latest financial crisis.

After all, Don Kohn has been at the Fed since 1970, although he only joined the Board of Governors in 2002. He is certainly in line for retirement.

As you may recall, Mr. Jordan has occasionally raised his voice in outrage at some of the dicier Fed dealings since then, such as the trading in Goldman stock by the Chairman of the NY Fed, Turbo Timmy's boss, while they were in the process of providing them billions of dollars in public assistance.

By October 26, 2009, Mr. Friedman’s paper profits on the shady trade were $5.4 million, reported Bloomberg News. “It’s an outrage,” said Jerry Jordan, former president of the Cleveland Fed. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.” Bloomberg News comments: “suspicions that the fix was in for Goldman Sachs have been fanned by the firm’s political connections.”Wall Street Bailout: History's Largest Theft? - Oct. 28, 2009

Don Kohn has always struck me as more of a 'company man,' coming from the Alan Blinder school of Public Service:

"The last duty of a central banker is to tell the truth to the public."

He tended to pander to Wall Street, and was among the first to attempt to try and take moral hazard off the table as a consideration in bailing out the big banks. Citizen Kohn

It will be interesting to see what kind of a truthteller Mr. Obama will nominate to take his place. Christina Romer's name has been mentioned. Janet Yellen is being groomed for something. With Kohn's departure, Ben remains the only macro-economist, with the remainder of the Governors from the banking profession. This certainly seems to disqualify Mr. Geithner, who is neither economist nor commercial banker, but a kind of bureaucrat.

If it is Timmy, I may not be able to hold down solid food for a few days. I wonder if Larry Summers would take second place. If so, watch your back Ben. If not any of them, then a Chicago crony would be likely. Rahm? Yikes!

A more obscure economist perhaps? Obama is said to be looking for an inflation 'dove.' Brad DeLong has previously stated on his blog that Alan Greenspan never made a policy decision which which he disagreed. Krugman carries more weight, and is also a dove, and certainly his own man.

It is a shame that Robert Reich has no place in this Democratic Administration. He would have been a better Treasury Secretary than Timmy, but again, perhaps less pliable for the banks. My own choice for Governor at least would be a maverick like Janet Tavakoli or Yves Smith. It would be nice to have someone on the board who understands the more innovative aspects of the financial markets from a practical perspective. And of course the meetings would probably be much more interesting given their willingness and ability to ask the right questions.

And we can only wonder what new financial patent medicines wrapped in black boxes that Zimbabwe Ben may have in his cabinet of curiousities.

Reuters
Fed Vice Chairman Kohn to leave in late June
By Mark Felsenthal
March 1, 2010

WASHINGTON, March 1 (Reuters) - Federal Reserve Vice Chairman Donald Kohn, a 40-year veteran of the U.S. central bank, will step down in late June, giving President Barack Obama a chance to reshape the institution.

In a letter to Obama released on Monday, Kohn, who has served as the Fed's No. 2 since June 2006, said he will depart when his current term as vice chairman expires on June 23.

"The Federal Reserve and the country owe a tremendous debt of gratitude to Don Kohn for his invaluable contributions over 40 years of public service," Fed Chairman Ben Bernanke said in a statement.

Kohn, 67, began his career at the Kansas City Federal Reserve Bank in 1970 and rose through the ranks to become one of the more influential vice chairmen in the central bank's history.

He has served on the Fed's Board of Governors since August 2002.

His departure would leave three seats vacant on the normally seven-person Fed board in Washington, giving Obama broad latitude to shape the Fed at a time lawmakers are considering lessening its power after the most damaging financial crisis in generations.

Members of the Fed board are nominated by the president, but subject to confirmation by the U.S. Senate.

Among possible replacements, the president may be considering Christina Romer, a prominent economist who currently heads the White House Council of Economic Advisers.

Another possibility might be Fed Governor Daniel Tarullo, a lawyer and expert on banking regulation appointed by Obama, who could shepherd the bank into a greater focus on financial oversight and consumer protections. (Editing by Chizu Nomiyama)

Pictures of a Market Crash: Beware the Ides of March, And What Follows After

There are a fair number of private and public forecasters with whom I speak that anticipate a significant market decline in March. As you know I tend to agree to some extent, but with the important caveat that we are in a very different monetary landscape than the last time the Fed engaged in quantitative easing, the early 1930's. In short, I may allow for it, but I am not doing anything different about it -- yet.

The biggest difference is the lack of external standards. This introduces an element of policy decision that has been discussed here on several occasions. In other words, the Fed retains the option, albeit with increasing difficulty, to create another bubble, and levitate stock market prices in the face of deteriorating economic fundamentals.

The dollar was formally devalued by around 40% in 1933. We may yet see that done this time, but more gradually and informally. This is what makes gold controversial today; it exposes the financial engineering. So they feel the need to manage it, to denigrate it as an alternative to their paper. They want to have their cake, and eat it too.

Let's review where we are today.

The Bear Market of 2007-2009, marked by the Crash of 2008, has been a massive decline in equity prices precipitated by the bursting of the credit bubble centered around housing prices and packaged debt obligations of highly questionable valuations. The cause of the bubble was easy Fed monetary policy and the loosened regulation of the financial sector, which reopened the door to old frauds with new names.



Even today, I think most people do not appreciate the sheer magnitude of the decline, and the damage it has done to the real economy. This is the result, I believe, of three factors:

1. An extraordinary expansion of the Monetary Base by the Federal Reserve not seen since the aftermath of the Crash of 1929, and a swath of financial sector support programs from the Fed and the Treasury, resulting in a spectacular fifty percent retracement rally from the stock market bottom. This is the narcotic that permits the country to not notice that a leg is missing.

2. A comprehensive program of perception management by the government in conjunction with the financial sector to sustain consumer confidence and reduce the chance of further panic. In other words, a web of well-intentioned deceit, subject to abuse.

3. An understandable preoccupation by the individual with the details of breaking news, and a short term focus on particular events, diversions, and controversies, bread and circuses, without a true appreciation of the 'big picture,' in part because of some very effective public relations campaigns and a natural human reluctance to face hard problems.

This is resulting in a remarkable case of cognitive dissonance in which some of the victims of a spectacular man-made calamity are opposing remedies and aid as too costly and impractical, even as they walk around amongst the bleeding carnage.

For those who read the contemporary literature in the early Thirties, this is nothing new. In the early Thirties there was no sense, except for a few notable exceptions, of the magnitude of what had so recently happened. There was the sense of life goes on which seems almost eerie now to a modern reader. Indeed, Herbert Hoover could dismiss a delegation of concerned citizens with the advice that they were too late, the crisis was past, and all was well. Sound familiar?



The parallels with the Thirties and the Teens (today) are many, and uncanny.

There is the reformer President, elected to redress the extremely pro-business policies of his Republican predecessor. In the Thirties they had FDR who was a decisive and experienced leader. In the Teens the US has a relatively inexperienced community organizer, more influenced by the Wall Street monied interests, and a past history of 'playing safe,' who is trying to manage through indirection and persuasion.

There is a Republican minority in the Congress which opposes all new programs and actions despite giving lip service in order to delay and debilitate. In the Thirties the Republicans were over-ridden by a powerful, activist President, who created a "New Deal" set of legislation, much of which was later overturned by a Supreme Court which had been largely seated by the previous Republican Administrations.

Indeed, the remaining New Deal programs that were successful, the reforms of Glass-Steagall and the safety net of Social Security, are being overturned or are under attack in an almost bucket list fashion.



So what next?

Another leg down in the economy and the financial markets is a high probability.



Although one cannot see it just yet in the fog of corrupted government statistics, the economy is not improving and the US Consumers are flat on their back, scraping by for the most part, except for the upper percentiles who were made fat by the credit bubble, and are still extracting rents from it through officially sanctioned subsidies.

This was no accident; there is a consciousness behind it.

There are far too many otherwise responsible people who are not taking the situation with the high seriousness it deserves. Some would even like to see the US economy collapse, inflicting serious pain and deprivation because it may:

1.suit their investment positions and feed their egos because they think themselves above it all,
2. satisfy their ideological and emotional needs to see punishment administered, almost always to others, for the excesses of the credit bubble, especially if they are relatively weak, unwitting victims, and
3. the sheer nastiness and immaturity of a portion of the population which wallows in stereotypes, childish behaviour, and disappointment with their own lives. They tend to find and follow demagogues that feed their bitter hatreds.

They know not what they do, until they do it, and see the results. It is often a good bet to assume that people will be irrational, almost to the point of idiocy and self-destruction. And some of them never wake up until they are overrun, and then will not admit their error out of a stubborn sense of pride and embarrassment.

It seems likely that there will be a new leg down in financial asset valuations, as reality overcomes often not-so-subtle propaganda and disinformation. It may start in March, or it may be a 'market break' that provides a subtle warning for a large decline that begins in September 2010, with multi year progression to lows that are, as of now, almost unimaginable, at least in real terms. I cannot stress this issue of nominal versus real enough. As inflation comes, it will initially be in a 'stealth' manner, with the backing of the currency eroding slowly but steadily, and largely unrecognized for some time. It is not enough to try and count the dollars; one also has to consider the value behind them, the quality of the wealth, and its vitality. This is the case for stagflation.

The Fed is acting to mask quite a bit of this. One would hope that they would also not re-enact the policy error of their predecessors and raise rates prematurely out of fear of inflation before the structural healing can occur.

The debt incurred during the credit bubble cannot be paid and must be liquidated. So far we have largely seen transference of debt obligations from insiders to the public. Ironically these same insiders are lobbying to maintain these subsidies and transfers, and also to take a hard line against any further remediation of the consequences of the collapse, which they caused, on the public, to have more for themselves. Their greed and hypocrisy know no bounds.

But the policy error might not be caused by the Fed's direct action, but replicated by a governmental failure to stimulate the economy effectively AND to reform the highly inefficient and impractical financial system. The purpose of stimulus is to provide a cushion for structural reform and healing to occur, after an external shock, or even a period of reckless excess and lawlessness. The natural cycle can be disrupted beyond its ability to repair itself. But stimulus without reform is the road to further deterioration and addiction.

As it stands today the global trade system is a farcical construct that favors national elites and multinational corporations. Public policy discussion has been trumped by a handful of economic myths and legends that, even though disproved every day, nevertheless remain resilient in public discussions and reactions. This is because they have become familiar, and because they are the instruments of deception for certain groups of disreputable economists and policy influencers.

A more serious market crash might cause people to recognize the severity of their problems, and the thinness of the arguments of the monied interests for the status quo which is most clearly unsustainable. But a sizable minority of the population is always highly suggestible; demagogues rely on this.

The eventual outcome for the US is difficult to forecast with any precision now because there are multiple paths that events might take at several key decision points. Some of them might be rather disruptive and upsetting to civil tranquility. Game changers.

But as the dust continues to settle, the probabilities will continue to clarify.

"Suffering can strengthen our endurance. Endurance encourages strength of character. Character supports hope and confidence even during hard times and trials. And hope does not disappoint us in the end, because God has given us the Spirit and filled our hearts with His love." Romans 5:3-5

It is right to be cautious, and it is human to be afraid. But let us not allow our fears and trials to turn us from our genuine humanity in God's grace no matter how dire the day, even if it may drive some of the world once again into the jaws of desperation and madness. And if you stumble, gather yourself up and go forward again without turning from the way. For what is the profit to gain and hold some small and temporary advantage in this world, but to lose your self, forever.