Embry touts new gold trust and merits of holding gold

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 if it in physical gold.

Although the gold guru himself holds 75% of his portfolio in gold (not counting his sizable Sprott investment) he says an ordinary person should hold 20% of their 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 a number people think you are nuts,” Embry says. “But trust me; the one thing I own that I don’t worry about is gold.”

Gold has become more accessible in recent times with products like exchange-traded funds (ETFs), pool accounts and gold certificate but for the more traditional, there are still smaller bullion coins, wafers and bars.

Sprott Asset Management has recently created the 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 ounces so you are talking half a million bucks,” says Embry, who was co-chair of the Central Gold Trust until the new Sprott trust came out.

This isn’t Sprott’s first gold-backed fund. Sprott teamed up with North America’s only publicly traded bullion fund, Central Fund of Canada (CEF.A-T, CEF.U-T, CEF-X), in 2003 to create a second fund, the Central Gold Trust (GTU.UN-T, GTU.U-T, GTU-X). (There are many other gold-backed ETFs not connected to Sprott)

Seven years ago, though, the enthusiasm for buying physical gold just wasn’t the same. When Embry went to market the Central Gold Trust he was surprised at the reaction.

“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 of the Central Gold Trust was C$46 million (it’s now worth $567.5 million) while the IPO for the Sprott Physical Gold Trust 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 of 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 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 so-called gold-backed fund doesn’t actually hold the physical gold 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 then since the 2003 when the Central Gold Trust came out.

“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 the investment into physical gold Embry says there is still a lack of conviction.

“European buying for physical gold is going off the chart. It’s starting 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, I think that would bring more and more people into gold,” Embry says. “We’ve barely scratched the surface.”

Gold can help protect a portfolio from inflation, stock market crashes and currency devaluation.

Embry feels that the value of paper money is at sever 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$1,500-1,600 per oz. by the end 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 oz. again. Ever. In history.”