When you buy precious metals from a dealer, you immediately lose money due to the spread. In my case, it was about 1.5% on the way in, and if I had turned around and sold it right back, I would have lost another 1.5%. That spread is how dealers make money. Better dealers charge less, worse dealers charge more, but either way you get confused.
Then there is storage. You need a safe deposit box, maybe you need to update your home insurance, and suddenly the “simple” act of owning gold or silver comes with friction and ongoing costs. None of that is a deal breaker. There’s still something uniquely satisfying about holding physical metal in your own hands, under your own name, without any counterparty telling you what to do.
But if your goal is diversification rather than doomsday preparation, funds make much more sense. Gold and silver have historically held up through certain periods of market stress, including 2022 and more recently. If you want that exposure in a brokerage account, my preferred route is a physically backed fund. For Canadian investors, two of Sprott’s longstanding options stand out.
The best gold fund
The first choice is the Sprott Physical Gold Trust (TSX:PHYS). Despite what many people think, this is not an exchange-traded fund (ETF). It is a closed-end fund.
ETFs can create and redeem shares on demand, keeping their market price closely aligned with their net asset value (NAV). Closed-end funds don’t work that way. They have a fixed pool of shares unless a secondary offering is issued.
Because of that structure, PHYS can trade at a premium or discount to its NAV. The price you see in your trading account may be higher or lower than the value of the gold actually in it.
Currently, PHYS is trading at a discount of approximately 1.65% to NAV. That means you’re buying gold for less than the underlying asset, although there’s no guarantee the discount will ever close.
Apart from that pricing mechanism, the trust is simple. It owns approximately $16 billion in assets, all backed by physical gold. On December 17, the trust reported holding 3,687,798 ounces of gold.
When you buy stock, you buy partial ownership of that pile of metal. The management expense ratio is 0.39%, which works out to approximately $39 per year on a $10,000 investment. That is very typical for a physically covered precious metals fund.
The best silver fund
For exposure to silver, the natural companion is the Sprott Physical Silver Trust (TSX:PSLV). Sprott specializes in commodity-focused funds, and this trust mirrors the structure of PHYS, but with silver instead of gold.
Currently, PSLV owns approximately $13.82 billion in assets, equivalent to approximately 207,508,993 ounces of silver under its custody. Like PHYS, investors get fractional ownership of that silver instead of exposure through derivatives.
PSLV currently trades at a larger discount to NAV than its gold counterpart, around 3.7%. That could be attractive if you want exposure to silver and are comfortable with the possibility of the discount continuing.
The trade-off is cost. PSLV has a management expense ratio of 0.57%, which is higher than PHYS but still fairly standard for silver funds in Canada, even compared to newer ETFs.
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