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December 2015 produced little movement in prominent asset classes. In this tepid environment, spot gold was virtually flat, declining three-tenths-of-one-percent to $1,061.42 per ounce. While December’s small increments of change seem to imply relative stability in market fundamentals, we would suggest that a confluence of underlying developments have actually increased probabilities for elevated market volatility in early 2016, especially in precious-metal markets.

After posting annual increases in U.S. dollar terms for 12 consecutive years through 2012, spot gold (measured in dollars) has now declined for three straight years. As investors look forward to 2016, the relevance of gold as a portfolio diversifying asset is facing legitimate debate. Do declines of the past three years represent logical correction of prior strength, or a signal that gold’s bull market since 2000 has indeed reached conclusion. In this report, we review our three suggested litmus tests in assessing gold’s ongoing portfolio relevance, and then present our “top-ten” reasons gold may be shaping up for a surprisingly strong performance in 2016.

1. We would suggest the most powerful litmus test for gold’s ongoing relevance is an assessment of whether the U.S. financial system could endure normalization of interest rate structures. Should the Fed raise fed funds to 3%-to-4%, or should 10-year Treasury yields trade back to 6%-to-8%, without significant negative impact to the U.S. financial system, we would concede constructive progress might have been achieved in rebalancing U.S. financial markets. We would assess current probabilities for either of these developments as somewhat remote. In such an environment, gold remains a productive portfolio asset.

2. We believe gold will remain a productive portfolio-diversifying asset until the process of debt rationalization is allowed to proceed in the United States. Since 2000, the Fed has now interceded to forestall this rebalancing process on three prominent occasions. To us, normalization of the relationship between claims on future output and productive output itself will eventually return ratios such as debt-to-GDP and HHNW-to-GDP to historically sustainable levels, say below 200% and 350% respectively. Because prevailing GDP levels would imply (respectively) $20 trillion and $30 trillion in either debt defaults or depreciation of financial asset prices, we suspect the Fed will do everything in its power to postpone this rebalancing. Given implications for declining intrinsic value of U.S. financial assets, as well as ongoing Fed efforts to debase outstanding obligations, gold remains a productive portfolio asset.

3. Should the U.S. economy resume a GDP growth rate between 3%-to-4%, with a net national savings rate in the 8%-to-10% range (now roughly 1%), there would no longer be a need for the $2.0 trillion-or-so in annual U.S. nonfinancial credit growth now necessary to service outstanding debt and drive consumption. In such an environment, gold would hold limited investment utility.

In short, we would suggest litmus tests for gold’s ongoing relevance continue to register strong positive readings. However, given gold’s weak performance for now three years running, are there any fundamental factors which might lend urgency to a portfolio commitment to gold at the current juncture? We have collected for quick consideration our “top-10” reasons that the performance of gold is likely to surprise in the coming year. We will utilize this framework of salient fundamentals to assess gold’s prospects throughout 2016 and look forward to continuing the gold conversation with all Sprott clients.

January 2016

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January 2016

1.) U.S. Dollar is a Crowded Trade

U.S. dollar sentiment among western investors has become close to unanimously bullish. The Bernstein Daily Sentiment Index for the U.S. dollar registered a 90% bullish reading on 1/5/15. MacroMavens reminds us in Figure 1, below, that combined net speculative longs for the euro, yen and pound have almost regained their January 2015 all-time high. Somewhat counter-intuitively, examination of Fed tightening cycles since 1986 reveals that, without exception, the date of first rate-hike marked an effective six-month peak in dollar strength. Figure 2, below, demonstrates that average troughs for the trade-weighted dollar index during the six months following “liftoff” measured 5% to 10% declines. We would suggest global trends including central bank F/X liquidation and declining importance of the petrodollar float help to explain why the DXY dollar index has now stalled four times since this past March in rallies toward par.

Figure 1: CFTC Combined Net Speculative Longs Euro, Yen and Pound (1999-Present) [CFTC, MacroMavens]

Figure 2: Performance of Trade-Weighted U.S. Dollar Following Initial Fed Rate Hikes since 1986 [Thomson Reuters, Credit Suisse]

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January 2016

2.) Foreign Demand for U.S. Treasuries is Declining

Foreign demand for Treasuries has collapsed in recent quarters, despite persistently wide spread-premiums to competing global sovereigns. During the past twelve months, net foreign Treasury demand fell below zero for the first time since 2001 (Figure 3, below). Perhaps more ominously, net transactions by foreign central banks during the same span amounted to an outright sale of $203 billion (Figure 4, below), the worst 12-month sum in the history of this series (initiated 1978). The PBOC reported 1/7/16 that Chinese F/X reserves fell by $107.92 billion in December, the biggest monthly drop on record. During 2015, China’s F/X reserves fell by $512.66 billion, the largest annual decline on record. With global F/X reserves having doubled to $12 trillion during seven years of Fed QE programs, we expect dollar-denominated reserve assets to endure consistent pressure during the next few years as foreign central banks draw down F/X reserves in an effort to offset reversing capital flows.

Figure 3: Net Foreign Treasury Purchases (12-month sums 1993-Present) [TIC, Meridian Macro]

Figure 3: Net Foreign Treasury Purchases (12-month sums 1993-Present) [TIC, Meridian Macro]

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January 2016

3.) U.S. Recessionary Warnings are Flashing

Growing numbers of economic indicators in the United States are beginning to flash red. The Cass Freight Index, Association of American Railroads carload and intermodal statistics, and orders for trucks and rail cars have all experienced sharp declines in recent months, traditionally reliable recessionary indicators. Recent readings for industrial production, construction spending, factory orders, retail sales, housing starts and existing home sales have disappointed consensus. The Atlanta Fed’s GDP Now forecast for Q4 GDP now stands at 0.8% (1/8/16). As shown in Figure 5, below, the ISM Manufacturing Index has declined to contractionary levels during the past two months, matching the lowest levels since June 2009. While weakness in the ISM Manufacturing Index is frequently dismissed due to the limited contribution of manufacturing to U.S. GDP calculations, we would point out that all ten of the past ten instances of a rapid PMI decline in the context of flat U.S. equity markets correctly identified recessions, with zero false signals. As MacroMavens points out in Figure 6, below, the largest inventory build of the past 50 years is just beginning to unwind, and will burden GDP significantly in coming quarters. Even more ominous, rising revolving credit during periods of decelerating retail sales has generally been a reliable recessionary indicator. As shown in Figure 7, below, the slopes of the current divergence between revolving credit and retail sales are startling. And finally, even credit-fueled car sales appear to have hit a wall this past week.

Figure 5: ISM Manufacturing Index (2002-Present) [Institute for Supply Management, Meridian Macro]

Figure 6: U.S. Inventory-to-Sales Ratio (12 mos. Sums 1965-Present) [MacroMavens]

Figure 7: U.S. Revolving Credit Gr. vs. Retail Sales Gr. (12-mos. sums 1993-Present) [MacroMavens]

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January 2016

4.) U.S. Credit Cycle is Turning

Valuations of high-yield debt and leveraged bank loans have been deteriorating since this past summer. At year-end, $482 billion worth of U.S. corporate bonds traded at distressed levels (yielding 10% or more). Contrary to consensus views, rising credit stress is not contained within energy sectors, but is actually spread over the entire continuum of industries. As shown in Figure 8, below, the majority of economic sectors have experienced during the past year a more than doubling of the percentage of bonds trading at distressed ratios. One of the byproducts of Fed liquidity programs has been abnormally low corporate default rates. Credit Suisse suggests in Figure 9, below, that the soaring percentage of North American companies operating in the red is likely to boost default rates significantly in coming quarters. Prominent short-term liquidity measures are also flashing stress readings—junk spreads, TED spreads and LIBOR OIS spreads are all trading at four-year wides.

Figure 8: Percentage of U.S. High-Yield Bonds Trading in Distress (Option Adjusted Spread > 1,000 bps) by Industry Group (Nov 2014 & Nov 2015) [Deutsche Bank, Thomson Reuters]

Figure 9: Percentage of N.A. Companies Losing Money vs. Moody’s LTM U.S. HY Default Rate (1985-Present) [Credit Suisse, Bloomberg]

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January 2016

5.) U.S. Equity Markets are Richly Valued and Breadth is Thin

By many prominent measures, U.S. equity markets are historically overvalued. Figure 10, below, depicts the current status of the venerable Buffett indicator—the ratio of U.S. corporate equities to GDP. After hitting a high of 129.8% in 2015 (87% above the 65-year historical mean of 69.5%), the ratio has now dropped swiftly to 114.4%. From such rarified heights, the two prior corrections since 2000 have returned this measure all the way to mean levels. The S&P 500 CAPE ratio (cyclically adjusted price earnings ratio during the past 10 years) now sits at 25.5. During the past 135 years (Figure 11, below), the CAPE ratio has only been higher on three occasions: 1929, 2000 and 2007. By the same token, breadth measures are registering strong warning signs. Amid these doubly strained market conditions, U.S. equity averages posted this past week their worst performances in an opening calendar week in history.

Figure 10: Buffett Indicator – Ratio of U.S. Corp. Equities to GDP (1950-Present) [Advisor Perspectives]

Figure 11: S&P 500 Cyclically Adjusted P/E Ratio (1890-Present) [Bonner and Partners]

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January 2016

6.) Gold Complex Experiencing Bullish Divergences

Since the onset of gold’s bull market in 2001, the interplay between spot gold, gold equities and broad U.S. equity averages has proved volatile. As demonstrated in Figure 12, below, the cumulative advance of the S&P 500 (dividends reinvested) totaled 107.56% during the past fifteen years, virtually identical to the 106.24% increase in the GDM Gold Mining Index during the same span (w/dividends). Spot gold has out-performed both equity indices handily, increasing 286.19%. Throughout the past decade-and-a-half, gold equites have generally performed well during years in which spot gold has posted double-digit gains and the S&P 500 has stalled. At seminal inflexion points along the way, gold equities have traditionally proved to be an effective harbinger for spot gold’s future prospects. During the past three months, important technical indicators in the gold complex are signaling the most important divergence of the past 15 years. Since late-November, spot gold has set three separate closing 52-week lows unconfirmed by all broad gold equity averages (GDX, GDXJ, XAU, HUI), a development which has not transpired since 2001. Should this emerging divergence hold, especially now that spot gold has regained the $1,100 per ounce level, a new leg of appreciation for gold equities may have begun. Prior cycles have proved explosive.

Figure 12: Annual Performance of Spot Gold, GDM Index & S&P 500 Index (2001-2015) [Bloomberg]

Figure 13: Price Performance of GLD versus GDX (trailing 12 months) [StockCharts]

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January 2016

7.) Physical Markets for Gold Establishing Durable Price Floor

During the past twelve months, offtake in the world’s leading physical markets for gold has been exceptionally strong. The Shanghai Gold Exchange, which has eclipsed the London Bullion Market Association as the world’s leading physical gold marketplace, reported 2015 physical withdrawals of 2,596.4 tonnes, a new annual record which equates to 80% of 2015 global mine production. Figures 14 and 15, below, outline monthly and annual physical offtake statics at the Shanghai Exchange. Roughly speaking, Shanghai withdrawals are composed of the aggregate total of Chinese imports, scrap recovery and domestic production, representing the broadest approximation of non-central bank Chinese offtake. Similarly, official Indian imports for 2015 are on course to exceed 1,000 tonnes, an 11% increase over 2014 levels (not including smuggling totals estimated in the hundreds of tonnes). Given prospects for extended volatility in both the yuan and rupee, we expect voracious domestic gold demand in China and India to set a durable price floor in future periods.

Figure 14: Shanghai Gold Exchange Monthly Physical Withdrawals (2008-Present) [ShareLynx]

Figure 15: Shanghai Gold Exchange Annual Physical Withdrawals (2009-Present) [ShareLynx]

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January 2016

8.) Gold Price Should Reflect Bloated Fed Balance Sheet and Federal Debt Levels in 2016

Between 2009 and 2013, as shown in Figure 16, below, spot gold was closely correlated to growth in the Fed’s balance sheet. Between 2000 and 2013, as shown in Figure 17, below, spot gold was closely correlated to growth in U.S. Federal debt levels and limits. We have always regarded the gaping divergence since 2013 between these two series and spot gold prices as a great mystery. Nonetheless, we expect these traditional correlations to revert toward longstanding means. Because we expect the Fed’s balance sheet and the U.S. federal debt limit to prove “sticky downward” in future periods, prospects for reversion strongly favor higher gold prices.

Figure 16: Shanghai Gold Exchange Annual Physical Withdrawals (2009-Present) [ShareLynx]

Figure 17: Spot Gold Price versus U.S. Federal Debt Limits and Levels (2000-Present) [Sharelynx]

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January 2016

9.) Gold is Diverging Positively from the Commodity Pack

During the second half of 2015, amid an accelerating slump in commodity indices, the relative performance of spot gold separated from the commodity pack. To us, gold’s positive separation from commodity indices is always noteworthy for two reasons. First, positive separation signals gold’s monetary characteristics are being increasingly coveted by the marketplace. We have never been enamored with gold’s commodity fundamentals – only the monetary characteristics justify portfolio allocation. Second, given the commodity-intensive nature of gold-mining, gold’s positive separation from the commodity complex can signal that earnings prospects for gold miners are set to improve. In Figure 18, below, we plot the ratio of spot gold versus the S&P Base Metals Index (as a proxy for miners’ input costs). The commodity collapse during the second-half of 2008, in a year in which spot gold posted a positive annual return of 5.78%, produced the huge surge in the middle of this graph. Few will recall that this surge initiated a three-year period (2008-2011) during which reported annual earnings for the entire XAU Index compounded at a 40.07% rate. While it is obviously too early to project where gold’s current divergence from commodity averages will lead, it is interesting to note that gold’s traditional role as purchasing power protector remains in full swing. As shown in Figure 19, below, the ratio of spot gold to Bloomberg’s comprehensive commodity index is breaking out to all-time highs.

Figure 18: Ratio of Spot Gold to S&P Base Metals Index (5/29/98-Present) [Bloomberg]

Figure 19: Ratio of Spot Gold to Bloomberg Commodity Index (5/29/98-Present) [Bloomberg]

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January 2016

10.) Extended CFTC Positioning Bodes Well for Short-term Gold Prices

Positioning of western commodity traders can exert short-term influence on commodity price-trends. In gold markets, commercial participants (jewelry manufacturers and bullion banks) are traditionally net short and speculators (hedge funds and money managers) are traditionally net long. Commercial participants in gold markets generally exhibit higher “threshold for pain” in short-term price movements because jewelry manufacturers are hedging existing inventories and bullion banks represent central banks and gold mining companies (with theoretically unlimited access to inventory). It is therefore significant that in recent weeks, commercial participants have reduced net short positions to the lowest levels in 14 years. Figure 20, below, highlights weekly CFTC positioning in gold markets since 2014 (light purple specs, dark purple commercials). Figure 21, below, depicts net commercial short positioning since 1999. Suffice it to say, when jewelry manufacturers and agents for central banks see little downside, gold prices are generally set to rally significantly.

Figure 20: Current Positioning in Gold Futures (12/30/14-12/2915) [CFTC, Software North]

Figure 21: Weekly Net COMEX Gold Commercial Short Positioning (1999-Present) [CFTC, Lewis Capital]

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January 2016

Sprott Physical Bullion TrustsThe goal of the Sprott Physical Gold Trust, Sprott Physical Silver Trust and Sprott Physical Platinum and Palladium Trust (“the Trusts”) is to provide a secure, convenient and exchange-traded investment alternative for investors who want to hold physical bullion. The Trusts offer a number of compelling advantages over traditional exchange-traded bullion funds.

Secure • Convenient • Cost Effective • Potential Tax Advantage for U.S. Investors

Sprott Physical

Gold TrustSprott Physical

Silver TrustSprott Physical

Platinum and Palladium Trust

NYSE ARCA: PHYS NYSE ARCA: PSLV NYSE ARCA: SPPPPrice $8.93 Price $5.27 Price $5.42 NAV $8.98 NAV $5.30 NAV $5.52 Premium/Discount to NAV -0.46% Premium/Discount

to NAV -0.43% Premium/Discount to NAV -1.72%

TSX: PHY.U.CA TSX: PHS.U.CA TSX: PPT.U.CAPrice $8.95 Price $5.25 Price $5.50

Total Ounces Held 1,150,877 Total Ounces Held 48,969,515 Total Ounces Held 43,987 100,400

Total NAV of Trust $1,250,871,196 Total NAV of Trust $674,535,832 Total NAV of Trust $84,430,310

Figures as at January 12, 2016.

To learn more about the Sprott Physical Trusts, visit our www.sprottphysicalbullion.com or contact us at bullion@sprott.com.

Metal PricesMETAL CLOSE 1 WEEK YTD 1 YEARGOLD $1,086.56 0.8% 2.4% -11.9%

SILVER $13.78 -1.5% -0.6% -16.9%

PLATINUM $836.35 -6.0% -6.4% -32.7%PALLADIUM $470.65 -12.1% -16.4% -42.0%

Source: Bloomberg. Prices as at January 12, 2016.

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January 2016

The risks associated with investing in a Fund depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.Sprott Asset Management LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.

This article may not be reproduced in any form, or referred to in any other publication, without acknowledgement that it was produced by Sprott Asset Management LP and a reference to www.sprott.com. The opinions, estimates and projections (“information”) contained within this report are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report. 01

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About SprottSprott Asset Management LP is a leading independent asset management company headquartered in Toronto, Canada. The company manages the Sprott family of mutual funds, hedge funds, physical bullion funds and specialty products and is dedicated to achieving superior returns for its investors over the long term.

For more information, please visit www.sprott.com