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.
The Premiums for CEF and GTU
ReplyDelete"I think the current premiums tells us several things. Firstly, the market is telling us GLD and GTU are not the same. Those holding GTU do not want to trade their shares for GLD."
Since GTU is a closed end fund, investors can bid up its price to whatever they like. Its price does not have to match the price of gold.
I saw this when I was a silver investor looking at CEF (also seen within the link). I decided to pass on CEF. The transaction costs to buy physical silver myself (round trip) were lower than the premium on the fund. People had bid it up. This is in addition to the fund expenses.
Re: NAV
I like the concept behind CEF but 9% is nuts.
I'm with him. The counterargument is very weak to me. It assumes the premium will still be there when you sell. As seen in the CEF chart earlier, it could actually be a huge discount if you try to sell when everyone else does.
"Not only do you pay a premium when you buy it, you get a premium when you sell it."
ReplyDeleteThat's not necessarily true. As seen in chart within that first link, there was a 20% DISCOUNT in the early 1980s as investors fled.
Paying a premium to buy and getting a discount when you sell just adds to the pain.
Closed-end fund
ReplyDeleteThe price of a share in a closed-end fund is determined partially by the value of the investments in the fund, and partially by the premium (or discount) placed on it by the market.
Unless it is a discount, no thanks!
One more thought. I just read all of that last link.
ReplyDeleteWhy anyone would pay $30 per share for a fund whose portfolio value per share is only $10 is not well understood, although irrational exuberance has been mentioned.
Just something to think about when you see people willing to pay premiums over the true value of the item in question.
Mark,
ReplyDeleteGood points on closed-end funds. I agree that the premium on CEF is very high. Look at the premium on PSLV, the Sprott physical silver trust: 15.5%. That is going to hurt when it comes down!
The arbs usually keep these things in line, but with small funds, the prices can jump around a lot.