Known for his outrageous contrarian wagers, Michael Burry – made famous from the book and movie The Big Short – is no stranger to ruffling feathers. Based on the solid performance of his hedge fund, Scion Asset Management, there’s a method to the madness. Therefore, even though his bet on gold via the Sprott Physical Gold Trust (NYSE:PHYS) mutual fund seems outlandish, it’s worth looking into, if not just for Burry’s track record. Thus, I am bullish on PHYS and gold in general.
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Some Background About the PHYS Fund
According to TipRanks, the Sprott Physical Gold Trust “is a mutual fund that invests in physical gold bullion. It is designed to provide investors with a convenient and cost-effective way to gain exposure to the price of gold. The fund is managed by Sprott Asset Management and holds physical gold bars in secure vaults.”
The last point represents a major selling point regarding PHYS. Technically, 99.9% of the fund’s holdings are in 400-ounce gold bars. Further, according to Sprott’s website, PHYS unitholders “have the right to redeem for physical metals on a monthly basis, subject to meeting the minimum redemption amount.”
Stated differently, the PHYS fund doesn’t play games. If you buy the gold on “paper,” you own it for real. If you happen to follow precious metals experts like David Morgan, you’ll know that physical ownership is a huge deal in this investment community. However, it’s also true that physical bullion is dense. Therefore, a trusted custodial service may be appealing.
Further, the buying and selling of gold and silver is a cumbersome process at a bullion dealer. On particularly hot days, there could be a long line at your local coin shop. In contrast, investors can easily trade units of the PHYS fund, like a garden-variety stock or exchange-traded fund. This, too, makes Michael Burry’s platform of speculation attractive.
Gold’s Investment Oddity
Recently, the deadline passed for investment managers to disclose their holdings via Form 13F with the U.S. Securities and Exchange Commission (SEC). This disclosure cycle is of particular interest to retail investors because it may provide clues as to what the smart money is buying (and selling).
Naturally, Burry’s positions represent a great source of curiosity, in large part due to the fame achieved through The Big Short. Previous 13F disclosures involved acquisitions of everything from shipping companies to travel fare aggregators to legacy automakers. So, it’s tremendously odd that the hedge fund manager bought gold via the PHYS fund.
First, the aforementioned fund doesn’t pay a dividend. That’s an obvious point because gold is, at the end of the day, a commodity. Where would the dividends even come from? Second, and on a related note, neither the fund nor actual gold bullion has employees, businesses, or innovative technologies. Again, it’s an obvious statement: gold is simply a physical asset.
By logical deduction, then, the main thesis for PHYS aligns with the greater fool theory. To be clear, I mean this in the most respectful sense possible. When investors buy a hot tech firm, for instance, they’re often doing so because of its potential to either dominate an existing market or forge a new one. In other words, an accretive motivation exists.
On the flip side, gold – because neither pays dividends nor builds new businesses – largely rises because someone else is willing to pay a higher price for it. Granted, there could be many reasons why the price increases; namely inflation. The main takeaway is that gold doesn’t do much to inherently warrant upside. Instead, gold’s forward price trajectory is in the eye of the beholder.
Mitigation Effect Warrants a Closer Look
Since gold can’t directly justify its own price spikes, it runs on what I would term a mitigation effect. That is, gold is bought to mitigate some other circumstance, such as the impact of inflation. Why is this important for you? Frankly, because gold is a “loser’s bet.” Allow me to explain.
Due to the nature of precious metals, gold is effectively a reactionary play. Consider a losing chess game where you’re out of ideas and are merely reacting to your opponent. If I may be blunt, gold typically can’t deliver blistering returns unless something bad happens – or if something bad is threatening to happen.
To note, the PHYS fund is Michael Burry’s biggest position currently. That’s significant because it implies that one of Wall Street’s best and brightest minds believes something unpleasant is lurking. Given the various economic challenges such as elevated inflation, high debt loads, rising delinquencies, and many other headwinds, there are plenty of reasons to be concerned.
Thus, PHYS and gold investments, in general, deserve a closer look.
The Takeaway: Michael Burry Is Concerned, and You Should Be Too
Hedge fund manager Michael Burry has made many contrarian wagers. That’s how he became famous. At the same time, the investment in the PHYS fund (currently his biggest) warrants a deep examination. By its nature, gold can’t do anything of itself to generate market returns. Instead, it’s largely a reactionary investment – typically a reaction to something unpleasant. As a result, retail investors may do well to take a closer look at the precious metals ecosystem.
