Sprott Physical Gold & Silver Trust Annual Report - A Look Back at 2023

Considering an investment in Sprott Physical Gold & Silver Trust? This summary cuts through the jargon, offering a clear look at the Trust's performance, especially during its last fiscal year, which ended December 31, 2023. We'll highlight the key takeaways to help you understand if it aligns with your investment goals.

Key Insights from the Annual Report:

Business Overview

Sprott Physical Gold & Silver Trust (trading as CEF on NYSE Arca) provides investors with a secure and straightforward way to own physical gold and silver without the hassle of direct buying and storage. The Trust began operations in October 2017, taking over the assets and responsibilities of the former Central Fund of Canada Limited (CFCL).

The Trust's core strategy is to hold actual, physical gold and silver bullion for the long term, explicitly stating it does not speculate on short-term price movements. It aims to keep at least 90% (and up to 100%) of its total assets in physical gold and silver bars. As of December 31, 2023, its portfolio consisted of 58.9% physical gold bullion and 40.9% physical silver bullion, with a small 0.2% in cash.

For the fiscal year ending December 31, 2023, the Trust filed its annual report. This year proved exceptionally strong, largely due to soaring gold and silver prices, which significantly boosted the Trust's overall value. During the year, the Trust issued 318,407 new units (shares) through its "At-The-Market" (ATM) Program, raising $15.4 million. However, it also redeemed a substantial 9,894,708 units for $321.6 million worth of gold, silver bullion, and cash. This activity reduced the total number of outstanding units from 200.5 million at the end of 2022 to approximately 190.9 million units (shares) by the end of 2023. Despite holding fewer physical ounces due to these redemptions, the Trust's overall value surged because of the dramatic increase in gold and silver prices.

Financial Performance

The Trust experienced an exceptionally strong year, primarily driven by the impressive performance of gold and silver prices.

• Growth in Net Assets from Operations: The Trust reported a substantial $4,360.1 million increase in net assets from operations in 2023, a significant jump from $1,017.7 million in 2022. This figure represents the overall financial gain from its holdings and activities after expenses.
• Unrealized Gains (Paper Profits): The Trust saw a massive increase in the value of its holdings that had not yet been sold. Unrealized gains on physical gold bullion soared to $2,005.1 million in 2023, a huge increase from $683.7 million in 2022. Even more dramatically, unrealized gains on physical silver bullion reached $2,182.6 million in 2023, compared to just $260.0 million in 2022. This highlights how much the market value of its metals increased without the Trust selling them.
• Realized Gains (Profits from Sales): When the Trust sold some bullion (mainly to fund redemptions), it generated significant profits. Realized gains on gold bullion more than doubled to $141.6 million in 2023 from $70.4 million in 2022. Similarly, realized gains on silver bullion also more than doubled to $59.4 million in 2023 from $25.7 million in 2022.
• Net Assets and Value Per Unit: The total value of the Trust's net assets (what it owns minus what it owes) grew significantly to $9,065.0 million by December 31, 2023, up from $5,012.5 million at the end of 2022. This means the Trust's value almost doubled in one year. The value per unit (share) also saw a huge jump, reaching $47.48 per unit in 2023 compared to $25.00 per unit in 2022.
• Bullion Holdings: While the value of its holdings increased dramatically, the amount of physical bullion the Trust held actually decreased due to redemptions. It held 1,235,974 troy ounces of gold in 2023, down from 1,309,874 troy ounces in 2022. Similarly, silver holdings dropped to 51,767,761 troy ounces from 54,412,570 troy ounces.
• Spot Prices: The underlying reason for this stellar performance was the surge in metal prices. The spot price of gold jumped to $4,319.37 per troy ounce at the end of 2023, a big leap from $2,624.50 in 2022. Silver saw an even more dramatic increase, reaching $71.66 per troy ounce from $28.90 in 2022.
• Trust Performance vs. Metals: The Trust's return for the year was an impressive 89.9%, significantly higher than its 24.7% return in 2022. This compares to spot gold's return of 64.6% and spot silver's incredible 148.0% return for the year.
• Operating Costs: The costs to run the business (operating expenses) actually decreased slightly to $2.6 million in 2023 from $2.7 million in 2022. Even better, as a percentage of its average net assets, these costs became more efficient, dropping to 0.04% in 2023 from 0.06% in 2022.
• Management Fees: Management fees paid to Sprott Asset Management LP increased to $25.8 million in 2023 from $19.2 million in 2022. This increase directly correlates with the Trust's much larger net asset value, as the fee is a percentage of those assets.
• Auditor Fees: The Trust paid KPMG LLP around $185,410 in total fees for 2023, a bit more than the $167,177 paid in 2022. Most of this increase came from 'audit-related fees,' which rose from about $37,257 in 2022 to $53,478 in 2023.
• Market Discount: The Trust's units traded on the NYSE Arca at an average discount to their net asset value (NAV) of approximately 3.7% in 2023, an improvement from the 4.7% discount in 2022. This means the market price was closer to the actual value of the underlying metals.
• Distributions: As a physical bullion trust, the Trust does not make regular cash distributions to unitholders.

Risk Factors

While the Trust reported no significant changes to its overall risk level during the past year, like any investment, uncertainties and risks could cause actual results to differ from expectations.

The primary risk for this Trust is the price fluctuation of gold and silver. If the prices of these metals drop significantly, your investment's value will also decrease, even if the Trust operates efficiently. Other key risks include:

• Storage and Security Risks: Although bullion is securely stored at the Royal Canadian Mint or a major Canadian bank, there is always a risk of loss, damage, theft, or security breaches. The Trust relies on its custodians and insurance to mitigate these risks.
• Counterparty Risk: The Trust depends on the Royal Canadian Mint and its other custodians to safely store its bullion. Any financial distress or operational failure of these entities could impact the Trust's assets.
• Regulatory and Political Risks: Changes in government regulations, tax laws, trade restrictions, or geopolitical events could affect the value of precious metals or the Trust's ability to operate.
• Liquidity Risk for the Trust: While the Trust's units trade on an exchange, extremely high redemption requests that significantly outpace new unit issuances could force the Trust to sell bullion at unfavorable prices to meet those redemptions, potentially impacting its net asset value.
• Tracking Error and Market Discount/Premium: The market price of the Trust's units may not always perfectly reflect the underlying net asset value (NAV) of its bullion holdings. While the discount narrowed this year, units can trade at a discount or premium to NAV, which can affect investor returns.
• Availability of Bullion: Although unlikely, a theoretical risk exists regarding the continued availability of physical gold and silver bullion for the Trust to acquire if it were to grow substantially.

Management Discussion

Management discussed the Trust's financial condition and operational results, highlighting key factors and trends for the fiscal year ended December 31, 2023.

The Trust experienced an exceptionally strong period, primarily driven by the significant appreciation in gold and silver market prices. This led to a substantial increase in net assets from operations and an impressive 89.9% return for unitholders. The Trust's net asset value almost doubled, and the market discount of its units to NAV narrowed from 4.7% in 2022 to 3.7% in 2023, indicating improved market perception and investor interest.

Operationally, the Trust expanded its "At-The-Market" (ATM) program in December 2022 and again in May 2023, adding new sales agents, including BMO and Canaccord. This strategic move aims to enhance investor access and facilitate potential asset growth and unit distribution. The Trust also demonstrated improved cost efficiency, with operating expenses as a percentage of average net assets decreasing from 0.06% in 2022 to 0.04% in 2023.

However, the Trust faced certain challenges. Despite the overall growth in value, its actual physical holdings of gold and silver decreased because redemptions exceeded new unit issuances. Furthermore, the Royal Canadian Mint introduced a revised fee structure in March 2022 for bullion storage and physical redemptions. This change, attributed to the high volume of redemption requests in 2021 and early 2022, could lead to increased costs for managing and moving physical metals. The market environment also saw significant volatility, influenced by persistent inflation concerns, fluctuating interest rate expectations, and geopolitical events, which can create uncertainty for investors.

Management confirmed no changes to the Trust's Manager, nor any material changes to its investment objective or processes during the year, indicating a consistent core strategy. The most significant market trend affecting the Trust this year was the dramatic increase in gold and silver spot prices, largely influenced by the aforementioned macroeconomic factors. The Trust continues to monitor global economic conditions and any potential regulatory changes that could impact the precious metals market or its operations.

Financial Health

The Trust maintains a very straightforward and stable financial structure. It has no "off-balance sheet arrangements" (hidden debts) and no "long-term contractual obligations," meaning no complex financial agreements that could surprise investors.

Furthermore, the Trust explicitly states it has no borrowing arrangements in place and is "unleveraged." This means it does not borrow money to boost its investments, representing a very conservative approach. The Manager also confirmed that the Trust has historically not used leverage and does not intend to in the future (except for very short-term borrowing to settle trades). This commitment to an unleveraged structure is a positive sign for stability. They also ensure their physical gold and silver bullion remains "unencumbered," meaning it is not pledged as collateral for any loans.

While the Trust maintains a minimal cash balance (0.2% of assets at year-end), its operational expenses are primarily covered by management fees, which are a percentage of its substantial net asset value. This structure ensures sufficient liquidity for day-to-day operations without needing significant cash reserves or borrowing.

Future Outlook

Looking ahead, the Trust's performance will continue to depend primarily on the market prices of physical gold and silver. Management remains committed to its core strategy of providing a secure, transparent, and unleveraged way for investors to hold physical bullion. They anticipate continuing to use the "At-The-Market" program to facilitate growth and meet investor demand for units.

The Trust will continue to monitor global economic conditions, including inflation trends, interest rate policies, and geopolitical developments, as these factors significantly influence the demand for precious metals as safe-haven assets. Maintaining operational efficiency and a competitive expense ratio will remain key priorities. While acknowledging the inherent volatility of commodity markets, the Trust's consistent approach aims to provide a stable vehicle for long-term precious metal exposure.

Competitive Position

Sprott Physical Gold & Silver Trust aims to stand out by offering a secure, convenient, and exchange-traded way to own physical gold and silver, emphasizing transparency and direct ownership.

• Physical, Not Paper: The Trust does not invest in gold or silver certificates or other financial instruments that merely represent the metals. It holds actual, physical, fully allocated bullion. As of year-end 2023, its portfolio included 58.9% physical gold bullion and 40.9% physical silver bullion.
• No Derivatives: The Trust is prohibited from buying, selling, or holding complex financial tools called derivatives, keeping its investment strategy very simple and direct.
• Secure Storage: All its physical gold and silver bullion is stored at the Royal Canadian Mint or in the vaults of a major Canadian bank, on a "fully allocated basis." This means the specific bars the Trust owns are identified and held for it, not just a general claim on metal. This provides a high level of security and ownership clarity.
• Transparency & Audits: The Trust inspects its stored bullion periodically, and, along with external auditors, physically audits each bar annually to confirm its number. This demonstrates a strong commitment to verifying its holdings and providing transparency to investors.
• Competitive Expense Ratio: The Trust maintains a competitive expense ratio (0.04% of average net assets in 2023), which is attractive for investors seeking a low-cost way to hold physical precious metals compared to some other investment vehicles.