PHYS vs. GTU vs. GLD vs. GDX

I am currently long the Sprott physical gold fund, which trades on the NYSE under the symbol PHYS. On Friday, gold gained about 0.66% in price while PHYS traded lower at the end of the day. This is the second time I've seen this happen in the last month and I started to become a little concerned about the correlation of PHYS to the metal.


This motivated me to make a closer comparison of the physical metal funds and ETFs and gold stocks to see if there was a better way to leverage gold in a trading account.

PHYS and GTU are both Canadian bullion trusts that store physical gold, while the giant GLD ETF also stores physical gold, but the audits and conversion features are much less desirable. Because PHYS lets you take possession of the metal at a much lower threshold than GLD, it tends to carry a higher premium. It may also carry a trust premium. The GDX is an ETF made of gold miner stocks.

Looking back six months, I was a little alarmed to find that PHYS underperformed all the gold vehicles I was researching. It was a full 10% below the GLD, which does seem to track spot price movements reliably.


Looking back a full year, I found the results a bit more comforting. Over the full year, PHYS outperformed everything except gold stocks, which benefited from a rising QE2 fueled stock market. Over the full year, GTU was the laggard.


There are several dynamics that might explain the inconsistent performance. First, PHYS has a market cap only about 2% of GLD. It takes much less money moving in and out of PHYS to move it away from the spot price. Some people don't trust that GLD has all the gold they claim to have, but I don't have a strong opinion on that either way. The fact is that large players, hedge funds, banks, pension funds, can shove the price of PHYS up or down by accumulating or distributing shares. Over time, arbitrageurs should make the necessary adjustments, but over the short and even intermediate term, it may be more volatile than GLD.

CFNAI-MA3 on 8 month losing streak

The 3-month moving average of the Chicago Fed National Activity Index (CFNAI) came in at -0.10. This is the 8th consecutive negative reading going back to June, 2010.

The numbers are not in recession territory, but they also don't show much strength or momentum in the recovery. More like treading water.

Doug Short has some great charts on the CFNAI showing the long term trend line is still down.

Subjective Invective v.2

Geithner Says World in Better Position to Handle Oil-Price Jump

“The economy is in a much stronger position to handle” rising oil prices, Geithner said today during a Bloomberg Breakfast in Washington. “Central banks have a lot of experience in managing these things.”

I wonder what he ate at that Bloomberg Breakfast? Geithner believes our economic Central Planners can handle whatever happens with oil prices.

“The core of the American financial system is in a much stronger position than it was before the crisis,” he said. “We’re way ahead of any other major economy.”

That statement is a head scratcher. Let's look at a few macro readings to compare the before and after picture. For the before, I'll November 2007 since the recession officially began in December 2007.

Unemployment (from bls.gov)
Nov 2007: 4.7%, unemployed persons 7.2 million
Jan 2011: 9.0%, unemployed persons 13.9 million

Oil Price
Nov 2007: 95.93
Feb 2011: 99.67

Real GDP (annual rate, 2011 dollars, bea.gov, bls.gov)
Nov 2007: $14,834
Feb 2011: $14,870

Federal Debt (treasurydirect.gov)
Nov 2007: $9.080 trillion
Feb 2011: $14.124 trillion

Dollar Index
Nov 2007: 76.80
Feb 2011: 77.77

Fed Funds Rate (newyorkfed.org)
Nov 2007: 4.59%
Feb 2011: 0.15%

Case-Schiller House Price Index
Nov 2007: 179
Dec 2010: 131

Which of the above indicators shows that the "core of the American financial system is in a much stronger position"?

Maybe he means that hundreds of banks have failed each year since 2007 with almost 1,000 more on the FDIC watch list?

Maybe he means that two of the big three automakers already have their bankruptcy behind them?

Maybe he is talking about the nearly 10% (of GDP) structural deficit the government is running each year?

Maybe by "core" he means his personal friends.

iTulip link, long overdue

Eric Janszen, founder of iTulip.com is one of the most thorough, thoughtful analysts on the political economy I have read. I first discovered him in 2008 through this seminal Harper's Magazine article, The next bubble: Priming the markets for tomorrow's big crash.

It was the first time I remember seeing the acronym, FIRE (Financial Insurance and Real Estate) to describe the economy from the early 1980s through 2008. Since then, I've seen FIRE turn up in dozens of places.

My reluctance to link to it was simply because of the pay wall. Eric posts half of his analysis for free, and the other half behind a pay wall. I have paid for subscriptions in the past and plan to in the future. I think the content is worthwhile, but even if you choose not to subscribe, the free parts are still worth the visit.

FD: I have no relationship with Mr. Janszen and he will likely never be aware of my endorsement.

Subjective Invective v.1

Obama plans to cut deficit by $1.1 trillion

"We have a responsible budget that will cut in half the deficit by the end of the president's first term."

Really? The headline doesn't make sense then, because cutting $1.1 trillion over 10 years would not cut the deficit in half over the next 18 months. The CBO estimates that the deficit will grow this year, shrink to just under $800 billion in a couple of years, then explode again to $1.2 trillion by 2020.

"The challenge we have is to live within our means but also invest in the future," Lew said, adding "tough tradeoffs" would have to be made to achieve that goal.

All of these budget cutting proposals seem like a joke to me unless they target the largest budget items: Medicare, Medicaid, Social Security (non-discretionary) and Defense. I don't see any tough tradeoffs in the proposals.

A Democratic aide said the budget would reduce Pentagon spending by $78 billion over five years. Pentagon cuts would include the C-17 aircraft, the alternate engine to the Joint Strike Fighter and the Marine Expeditionary Vehicle that the Defense Department says it does not need.

How dare they cut something that the Defense Dept. doesn't need? Ike is rolling over in his grave. That $78 billion over 5 years is a whopping 1.5% of the projected deficits. Way to make a dent in the defense budget.

I wonder what would happen to the deficit if we had another recession before 2020, something I would wager heavily on (and have)? It would not surprise me to see a $4 trillion deficit before 2020.

note: subjective invective was inspired by Stagflationary Mark's sarcasm reports. The format fits my personality too much not to copy it. Thanks, Mark.

Consumer Credit Crucible

Here is a closer look at the details of the Federal Reserve G.19 Release on Consumer Credit (all amounts NSA). Since the financial system reckoning in October 2008, total consumer credit began declining and only stopped on a quarterly basis in August, 2010. The steep and sustained credit contraction is unprecedented since World War II. Non-revolving credit has been close to flat since the crash, while revolving credit continued to contract until December, 2010 as households repaired their balance sheets.



Total non-revolving credit started showing growth again in July, 2010, but the composition of that growth has been lopsided. Commercial banks and finance companies had a short-lived spike in 2009 loans, probably due to the Cash for Clunkers program, but since then, both have continued to contract. December 2010 showed an increase in commercial bank lending. We'll have to watch to see if this is a trend reversal. Securitized consumer loans fell down and can't get up, down more than 50%. The only sustained growth, which went parabolic after the crash and made up for contraction in all other categories by adding over $200 billion, was Federal Government/Sallie Mae student loans. That's a lot of money and a lot of people feeding the higher education bubble.



Total revolving credit peaked in July 2008 and is down about 18% through December, 2010. The last two months showed some signs of life. Whether this was one time holiday spending or a new trend is to be determined. An interesting footnote is the accounting change in March, 2010 that moved all securitized revolving credit back on to the balance sheets of banks. The net change of those two categories during the month of the accounting change was -$41.7 billion. How much of that was from pay offs vs. write downs is unknown.

While total consumer credit has stopped declining, the composition is unbalanced. Until December, 2010, households in general were still paying down debt faster than they are taking out new loans. The big exception is student loans, which have been growing at about 75% YoY since October, 2008.

Maybe the rapid growth in student loans corresponds to the rapid growth in unemployed people attempting to retool for a new career after the reckoning. I hope it works out for these new students because student loans, unlike other kinds of consumer credit, cannot be discharged in bankruptcy.