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Gold Discounts are Historically High

As we input yesterday’s Discount for the Sprott Physical Gold Trust (PHYS) we realized it was one of the lowest readings on record since data started being collected in 2010. Let’s rewind a bit and discuss what a premium/discount is.

To begin, closed-end funds like PHYS can sell at a premium or discount to their net asset value (NAV), and we have about eleven years of premium/discount data on the closed-end fund Sprott Physical Gold Trust (PHYS). We use that data to gauge gold sentiment — premium readings show bullish sentiment, and discount readings show bearish sentiment. We are taught to think of sentiment as being a contrary indicator, but that is not always the case. It is only contrary within a certain context. For example, if gold is trending up, we should expect sentiment to be positive, and vice versa. It is when it becomes ‘excessively’ positive (or negative) that it becomes contrarian. Current conditions provide us with a good example.

This is a monthly chart going back to 2010 when we started tracking discounts and premiums on PHYS. Readings are incredibly negative. We put the readings on a spreadsheet and yesterday’s reading -2.27 was #24 on the list. Today’s reading was -2.24 (number #29 on the list). The highest discount on record is -3.58.

Conclusion: What does this all mean? Looking at the chart, it could mean an upside reversal is coming based strictly on sentiment. The double-top on the monthly chart isn’t encouraging, but price lows do seem to follow higher discounts over time.

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