PHYS

Business Context and Reporting Period

Company: Sprott Physical Gold Trust (the "Trust")
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009 (Inception: August 28, 2009)
Business Overview: The Trust is a closed-end mutual fund trust established under the laws of Ontario, Canada, designed to provide investors with a secure, exchange-traded alternative to holding physical gold bullion. The Trust invests substantially all of its assets in unencumbered, fully allocated physical gold bullion stored at the Royal Canadian Mint. It is managed by Sprott Asset Management LP and listed on the NYSE Arca and TSX.

Key Financial Metrics

The Trust was inactive for the period from inception (August 28, 2009) to December 31, 2009. Consequently, there were no operating revenues, expenses, or gold holdings during this reporting period.

Note: The single unit outstanding represents the initial capital contribution of $10.00 made at inception.

Material Changes and Subsequent Events

While the Trust had no operations during the 2009 reporting period, significant capital-raising activities occurred subsequent to the balance sheet date:

• Initial Public Offering (IPO): Completed on March 3, 2010, issuing 40,000,000 units for gross proceeds of $400.0 million.
• Over-Allotment Exercise: Issued an additional 4,250,000 units in March 2010 for gross proceeds of $42.5 million.
• Follow-on Offering: Completed on June 1, 2010, issuing 24,840,000 units for gross proceeds of $279.5 million.
• NAV Update: As of June 25, 2010, the Net Asset Value (NAV) per unit was $10.7144.

Guidance, Outlook, and Risks

Management Commentary: The Trust does not actively trade gold to speculate on short-term price fluctuations. Its long-term performance is dependent on the price of gold. The Trust does not anticipate making regular cash distributions; distributions of net income and capital gains, if any, will generally be made in additional units.

Fee Structure:

• Management Fee: 0.35% per annum of net asset value.
• Expense Cap: Total expenses (including management fees) are capped at 0.65% per annum. If expenses exceed this cap, the management fee is reduced.

Key Risks:

• Gold Price Volatility: The value of units is directly tied to the price of gold, which is subject to global economic, monetary, and political factors.
• NAV Erosion: The Trust sells gold to pay ongoing expenses and cover redemptions. This reduces the amount of gold per unit over time, causing the NAV to decline unless gold prices rise sufficiently to offset expenses.
• Insurance: The Trust does not insure its assets. Recovery for loss, theft, or damage relies on the custodian's (Royal Canadian Mint) insurance or ability to satisfy claims.
• Taxation (PFIC): The Trust expects to be classified as a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes, which may result in adverse tax consequences for U.S. holders who do not make specific elections (QEF or mark-to-market).

Investor Verification Checklist

• Operational Status: Verify that the Trust was inactive during the 2009 reporting period and that all significant asset accumulation occurred in 2010.
• Expense Impact: Confirm the current expense ratio and the impact of the 0.65% expense cap on the management fee.
• Custody Arrangements: Review the Precious Metals Storage Agreement with the Royal Canadian Mint regarding liability limits and insurance coverage.
• Tax Classification: Consult a tax advisor regarding the PFIC status and the requirements for making a Qualified Electing Fund (QEF) election to mitigate U.S. tax liabilities.
• Redemption Terms: Understand the difference between cash redemptions (95% of NAV/trading price) and physical gold redemptions (100% of NAV less delivery fees).