Gold is gold is gold is gold, or is it?

Signed masterpieces, limited edition Bradman memorabilia and some NFTs can be valuable.

Their value comes from desirability inherent in the asset, but more importantly, their limited supply (sometimes only one exists) and provenance (signature, stamp, DNA blob, etc).

Generally, but not always, the more desirable, rare and certain of source it is - the more valuable.

But you can also have something that’s desirable and valuable, and not necessarily in scarce supply nor source certain. It can still be valuable, relatively speaking.

Take gold for example. One ounce in Tokyo is pretty much worth the same in Denmark and the world over allowing for exchange rates. Plus, once boomer rock is in ounce form (bullion or bars) it’s fungible, i.e., exchangeable on a one for one equivalent basis the world over.

There are some small exceptions. For example, only a couple of reputable mints provide numbered gold bars (the 1Kg bar is a good example) with the mint stamp + the serial number which identifies the bar and allows it to be allocated to a specified customer while it commingles with otherwise unallocated bars in a mint’s vault.

You pay more for a numbered 1Kg bar held in a credible mint in a low sovereign risk country than you do otherwise. But even so, this ‘utility’ premium is small, and like for like gold is gold is gold.

Gold is also in abundant supply and it could literally come from any part of the world and have been mined by exploited labour forces using environmentally unfriendly chemicals or processes - yet it still carries the same value.

But can gold bars and bullion be differentiated in a way that allows a community or influential group to suggest that it is more desirable than ‘run of the mill’ gold? And by being more identifiable and desirable, does it become more valuable?

Sprott ESG Approved Gold is fungible gold, with subjective non-fungible characteristics

While gold still requires mining (an element of which is carbon intensive) the features of desirability, rarity and certainty of source have definitely not been lost on the people at Sprott.

Perhaps in response to investor ESG mandates, last week Sprott launched the Sprott ESG Approved Gold Fund, or SESG

SESG is a gold fund that’s differentiated on the basis that it will buy Sprott ESG Approved Gold from Sprott ESG Approved Mining Companies.

This happens to include gold purchased from Agnico Eagle and Yamana (which makes me feel way better given they will be buying more gold from me, well, fractionally anyway) and others that in time will meet a range of criteria set by Sprott, it’s Mint and potentially other actors within the overall arrangement.

Sprott is a legend in mining circles. They’re credible and looked up to.

But in this context, and after proclaiming itself and it’s chosen Canadian mint as the sole arbiters of provenance, does Sprott ESG Approved Gold pass the pub test?

Let’s have a closer look at the prospectus

“As described below, the Trust will also hold unallocated gold on a temporary basis, which will not qualify as Sprott ESG Approved Gold. Sprott ESG Approved Gold and unallocated gold are described in more detail below.

OK, so it’s not just ESG gold? No, in fact:

“While there is no minimum amount of Sprott ESG Approved Gold that the Trust will hold, the Sponsor expects to exchange the Trust’s holdings of unallocated physical gold into Sprott ESG Approved Gold as soon as reasonably practicable, to the extent that unallocated physical gold is not needed under the circumstances described below.

The Trust will also, from time to time, on a temporary basis hold unallocated physical gold bullion under the following circumstances: (1) in connection with transfers of gold to settle creations and redemptions of Creation Units (as defined below); (2) until additional Sprott ESG Approved Gold can be refined by the Mint; (3) to the extent that the Trust holds gold in an amount less than a whole bar; and (4) in connection with payment of expenses of the Trust. Although the Trust intends to instruct the Mint to convert unallocated physical gold bullion to Sprott ESG Approved Gold as soon as reasonably practicable, there is no limit on the amount of unallocated physical gold bullion that the Trust can hold. The Mint’s ability to convert unallocated physical gold bullion into Sprott ESG Approved Gold depends on various factors, including the size of the Trust’s unallocated physical gold bullion holdings, the Trust’s need for unallocated physical gold bullion to meet redemption requests, the availability of raw material for the Mint to produce additional Sprott ESG Approved Gold, the Mint’s production capacity and certain minimum size requirements. The Shares are not a proxy for investing in gold.”

As well as the Sponsor, Sprott’s related entity can also charge fees to ESG investors regardless of whether it’s Sprott ESG Approved Gold.

The fee is accrued daily and is paid monthly in arrears at an annualised rate equal to 0.38% of the Trust’s daily NAV.

So if fees are charged for all NAV (not just Sprott ESG Approved Gold NAV), how is this different to normal gold and a traditional exchange traded fund, other than for it appearing to have a higher expense ratio for gold that might not all be ‘approved’?

And what about NAV:

In accordance with the Trust’s valuation policy and procedures, the Administrator will determine the price of the Trust’s Sprott ESG Approved Gold by reference to the LBMA Gold Price. This price will generally be based on the afternoon gold price as published by the London Bullion Market Association, which we will refer to as LBMA Gold Price PM.

OK, so no difference from an established benchmark. As far as the financial regulators and accountants are concerned, gold is gold is gold.

But as we know, shares will trade at market prices rather than net asset value and Sprott clearly thinks the ESG flavour will add some extra zing to either the demand for the fund, or the price action, or both.

They’re probably right due to fund mandates, but if those woke mandates were to change, it would likely fall in NAV value (which in turn would influence price action) and it’s only differentiator would be the sponsor and the fees charged, which I note are twice the size of some other allocated gold trusts which simply pass on the 0.18% storage fee. But do your own homework.

And on the question of rarity and desirability:

“Sprott ESG Approved Gold will be produced by the Mint specifically for the Trust using raw material that meets the criteria discussed below. Sprott ESG Approved Gold, as defined for purposes of the Trust, is not available in the general marketplace, although others, including other funds, may use the term “ESG” for gold used for their purposes.

Is this like Zuckerberg trying to suggest that facebook, ahem, sorry Meta, has a monopoly on the word Meta, even though it’s widely used and Matthew Ball was already using it as the ticker for his Roundhill Ball Metaverse fund? Not sure.

But what is it?

Here we have a definition:

The term “Sprott ESG Approved Gold” refers to gold that is physically indistinguishable from other gold but that has been sourced and produced in a manner consistent with the standards and criteria that are established by the Sponsor (the “ESG Criteria”), which are designed to provide investors with an enhanced level of ESG scrutiny along with disclosure of the provenance of the metal sourced, and include an evaluation of mining companies and mines.

The ESG Criteria are anticipated to evolve over time at the discretion of the Sponsor. Also, one or more criterion may not be relevant with respect to all sources of gold that are eligible for investment.

OK, it’s also indistinguishable, so gold is gold is gold.

However, while ESG is deemed to be an important investment parameter, maybe this gold might be in higher demand and/or worth more than non-Sprott ESG Approved Gold?

Or, will it simply provide mining exposure to ESG constrained investment managers that up until now had no avenue to invest in gold mining?

On the other hand, perhaps an interested ESG investor could simply buy the miners that will be supplying gold to the mint, like Yamana and Agnico - mandates permitting?

Here’s some further colour on the specific criteria for mining companies:

Factors that could be considered by the Sponsor in modifying the ESG Criteria include changes to current gold mining techniques or standards, evolving legal standards, the introduction of new standards or evaluation frameworks within the mining industry or the elimination of existing standards or frameworks that in the view of the Sponsor are relevant to the ESG assessment of a mining company or mine site. Mining companies and mines that meet the ESG Criteria (“Sprott ESG Approved Mining Companies” and “Sprott ESG Approved Mines”, respectively) must also comply with the Mint Responsible Sourcing Requirements (the “Mint Responsible Sourcing Requirements”). An overview of the Sponsor’s application of the ESG Criteria to mining companies and mines that can provide the material for Sprott ESG Approved Gold is provided below.

The application of the ESG Criteria involves multiple levels of analysis. While the Sponsor’s evaluation of mines and mining companies will include the objective factors discussed in the “Sprott ESG Approved Gold and Unallocated Gold” section of this prospectus, the Sponsor will also evaluate factors that will require the subjective judgment of the Sponsor. The selection of these factors and how they are applied will be based, at least to some degree, on the judgment of the Sponsor and may or may not be consistent with current or future standards used by others in the industry.

The ESG Criteria are subject to change by the Sponsor in its sole discretion. Any such changes will be reflected on the Trust’s website promptly after any change to the ESG Criteria, Sprott ESG Approved Mines or Sprott ESG Approved Mining Companies has been made.

Uh oh., changing the rules with impunity?

So far, ESG approved and non-ESG gold will commingle in the fund (for the same fees) with NAV based on the traditional LBMA benchmark, and with mining company and minesite ESG criteria evolving over time and subject to the potentially evolving views of two arbiters that can exercise subjectivity and report any such changes to shareholders, after the change.

That’s kind of like sticking a central body in between all bitcoin miners and giving that central body the power to approve a double spend. 🤔

Now we know what it is, and isn’t, but what about the ESG factors themselves?

With the erosion of trust, can good ESG be subjective?

From the prospectus:

“The ESG factors are a component of the ESG Criteria and are used for the ESG assessment of mines and miners, and generally will encompass the following factors:

Environmental Factors

●Energy use and greenhouse gas emissions

●Tailings and waste management

●Conservation and water management

●Mine site remediation

Social Factors

●Worker safety and health

●Community relations

●Natural resource benefit to local communities

●Child and forced labor

Governance Factors

●Corporate governance

●Workplace and gender diversity

●Fair executive compensation

●Corporate transparency and disclosures”

On the face of it, I’m good with most of that, but they are all subjective and do not appear to be programmatic in any way nor have any KPIs assigned. How will they be policed? Judgement? What standard should the ’management’ be? What is the definition of ‘fair’?

All of these non-programmatic decisions will have to be made subjectively.

I’m a little over that.

Then this:

“The Mint will cease refining gold from any Mint Approved Mine that no longer meets the Mint Responsible Sourcing Requirements, as determined by the Mint from time to time. The Mint Responsible Sourcing Requirements are subject to change by the Mint in its sole discretion.”

What if the mine does, but the acquirer of the miner does not?

And what about source certainty and provenance?

“In order to ensure that the Sprott ESG Approved Gold created by the Mint uses only doré from Sprott ESG Approved Mines, the Mint will create the Trust’s Sprott ESG Approved Gold in special production runs, and will charge a special processing fee for that. This special processing fee, along with any additional costs associated with the enhanced sourcing requirements of Sprott ESG Approved Gold, including researching, establishing and maintaining the ESG Criteria, assessing mining companies and mines against certain of the ESG Criteria and the diligence of the Trust’s Sprott ESG Approved Gold Holdings will be included in the Sponsor’s fee. All exchanges of unallocated gold to Sprott ESG Approved Gold and from Sprott ESG Approved Gold to unallocated gold are on a 1:1 basis, that is, each ounce of unallocated gold upon conversion will result in one ounce of gold content in the form of Sprott ESG Approved Gold, and vice versa. For purposes of such conversion, the Mint treats the content of gold contained in Sprott ESG Approved Gold as fully fungible with the gold the Mint holds on an unallocated basis, whether such unallocated gold originates from material sourced from Sprott ESG Approved Mines or elsewhere, given once the rough material is refined and fineness is taken into account, the resulting gold becomes interchangeable from the Mint’s perspective.”

Again, gold is gold is gold.

This is not a case of mining gold from the air or filtering seawater in a culturally, socially and planet friendly way without exploiting people - it’s still fuelling, drilling, digging, blasting, extracting, transporting, processing, milling and transporting ore and metal.

Hopefully, all of these activities and the minting are done to the higher levels of social, cultural and corporate sensitivity that communities now demand. But how would you know?

There’s no escaping the fact that the structure relies on oodles of trust between investors and the centralised arbiters of truth and provenance that they give power to, such that they can subjectively exercise judgement in relation to miners, mine sites, gold, and other items.

The verdict?

Maybe gold can go green and maybe Sprott (whom I admire greatly) is the group to approve it for those looking for exposure.

But if I want to own an environmentally and/or First Nation’s and culturally friendly miner with great governance, like Yamana or Agnico (in my opinion, do your own work) I would just buy more shares and continue to take the operational and management upside of owning an equity instead of an ETF or physical, along with the beta of holding the specific share.

If I want a tracking unit for gold, I would buy an index or some other gold backed trust or the physical stuff.

If I want differentiated gold, I would buy a serialised 1Kg bar from the Perth Mint or a special limited edition run of gold coins.

But do I want to mix the concepts of investing for currency debasement (by purchasing shares in a very good gold business or buying bitcoin) with ESG investing?

Do your own work, but for me and while SESG will perform however it performs (I make no predictions or judgements) I can think of better avenues than gold miners if I want to express an ESG exposure.

The real question is not about how green gold can be (if at all) it’s about trust

There is one caveat to the above. I might be happy to mix the concepts of gold and ESG investing if this was a decentralised, fractionalised and tokenised structure where the arbiter of truth is a like-minded community that has agreed to adopt certain standards which are programmatically set and automatically executed. I would even be happy for centralised parties to be involved as ecosystem service providers, but not under the current centralised set up.

We have technology to create a single source of pretty much immutable truth where we each don’t have to know or trust each other to participate in exchanges of value and culture (whether fungible or non-fungible).

The technology can allow physical items (e.g., approved, allocated and serialised gold) to be virtualised and fractionalised through tokenisation, and provide the desired mix of utility and community voting without the need for centralised management, and at nominal cost.

And, this technology coexists with public on and off ramps accessible by anyone with an internet connection that wants to transfer assets at the speed of light, on a 24/7 basis.

It’s called blockchain.

Some already socially inclusive blockchain projects are becoming more environmentally friendly by moving to less energy intensive, faster and more socially responsible consensus mechanisms, with increases in speed for no loss of security and governance.

This could be but one use case.

Can we just get on with it?

Mike.