Sprott: Another Option for Precious Metal Bulls

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Investors who are bullish on the prices of precious metals tend to buy a combination of bullion and mining shares. However, there is another option that investors should consider: Sprott Inc. (OTCMKTS:SPOXF)

Sprott is a Canadian asset management company. Its Chair and Chief Investment Officer is the infamous money manager Eric Sprott, who has made fortunes for himself and his clients over the past 12-13 years by keeping them, for the most part, out of traditional stocks and bonds, and investing these funds in gold, silver, and natural resource producers.

Today, Sprott offers an array of mutual funds and hedge funds. It offers private wealth management to wealthy clients, and it is involved in private equity funds. Finally, it has recently launched bullion ETFs, including:

  • The Sprott Physical Gold Trust (NYSEARCA:PHYS)
  • The Sprott Physical Silver Trust (NYSEARCA:PSLV)
  • The Sprott Physical Platinum and Palladium Trust (NYSEARCA:SPPP)

These funds have grown in popularity since their inceptions over the past few years given their favorable tax treatment and relatively simple legal terms.

Asset managers such as Sprott make the bulk of their money by charging a management fee on the money that they manage. The fee is correlated to the amount of money that they manage. So when investing in asset managers, the most important piece of information that you should look at is the type of assets that they manage. If the asset manager invests in assets that you are bearish on, then you should avoid that investment.

The bulk of Sprott’s assets under management (AUM) are related to precious metals and natural resources. Not only do the three trusts listed above comprise most of the company’s AUM, but its hedge funds and mutual funds have heavy exposure to precious metals, natural resources, and the companies involved in producing them.  Furthermore, Sprott has a reputation in this sector, and so private individuals will almost certainly only put their money with Sprott if they want exposure to precious metals and natural resources.

As a result, we can see a relatively strong correlation between Sprott’s total AUM and the values of these assets. When gold, silver, and commodity prices rose in 2009-2011, so did Sprott’s AUM. When they corrected in 2012-2013, Sprott’s AUM fell.

Given this correlation, it makes sense for investors who are bullish on these markets to consider a position in Sprott shares. But why invest in Sprott when you can simply invest in the assets that Sprott invests in?

There are two primary reasons for this. The first is that Sprott is growing its clientele, and therefore its AUM figures have been rising even when corrected for gold and silver. A bet on Sprott isn’t just a bet on precious metals rising in value. A bet on Sprott is a bet that more and more investors will want to participate in this rise and that they will do so through Sprott, which has a reputation for investing in this industry. For example, we see this growth in a recent deal made with the Korean company KEPCO to co-manage its pension fund.

Second, Sprott can make and has been making investments that retail investors cannot. For instance, Sprott recently made a deal to start a private equity management partnership with Zijin Mining Group in China, which is that country’s largest gold miner and second largest copper miner. While this partnership intends to invest capital in publicly traded companies, retain investors cannot possibly have the knowledge base that a large Chinese mining company has at its disposal.

Ultimately, Sprott stands out as a unique way for investors to gain exposure to the precious metals sector that has advantages that cannot be found elsewhere. While Sprott shares are no substitute for investments in mining companies or physical bullion, they are an appropriate part of any precious metals portfolio.

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