Gyroscopic Investing

I just checked the 5 year performance of GTU versus IAU and GLD. I was surprised to see that IAU and GLD have outperformed GTU by 40% over that time period! That seems like too much of a difference for anyone to be owning GTU. Anybody disagree?

Isn't that just what GTU does? It doesn't track GLD perfectly, but the 40% difference you're looking as it an artifact if the starting date; it appears there was a big but brief divergence around that time. Take a look at 4- or 6-year graphs and the difference narrows to about 10%.

And what might cause such a big, brief, unrecovered divergence of 30% or more? I've noticed that even today, GTU has been underperforming it's peers. If we are going to consider GTU a legitimate tracker of gold, then a 40% divergence over any period of time might not be acceptable.

It's a legitimate risk. Personally it's one I'm willing to take. I don't think I would if I lacked any physical gold though… other than the gold that I lost in a tragic bucket incident of course.

Pointedstick wrote: It's a legitimate risk. Personally it's one I'm willing to take. I don't think I would if I lacked any physical gold though… other than the gold that I lost in a tragic bucket incident of course.

Yes, I heard about that. So sorry!

If you buy GTU when the premium is down, don't you have much less risk of underperforming?  I've heard various rules of thumb on what the premium threshold should be to buy.  Some people say 2%; some say 0%.  Or maybe the key is to make sure that any GTU you sell is always at a premium at least as high as when you bought it.

Looking at the price history graph it seems to me that the reason that GTU appears to be underperforming over the last 5 years is that it was overperforming in early 2009.

stuper1 wrote: If you buy GTU when the premium is down, don't you have much less risk of underperforming?  I've heard various rules of thumb on what the premium threshold should be to buy.  Some people say 2%; some say 0%.  Or maybe the key is to make sure that any GTU you sell is always at a premium at least as high as when you bought it.

I buy GTU when the discount is 4% or better. Any other time and I buy one of the ETFs. And I assume one of these days the discount will turn into a premium (fingers crossed) and at that time I'll replace it with the ETF and pocket a nice gain.

That's the hope, at least.

Closed-end funds are strange creatures.  Who would pay a premium over market price for assets?  Who would not buy assets at a discount?  I understand why there might be a premium or discount - as a concept - but it really seems to be illogical to me.

I took a look at the Morningstar charts on GLD, GTU, and VTSMX on a price basis from 2008 on.  There is precious (pun intended) little difference between GLD and GTU for that time period, and obviously they both significantly outperformed Vanguard Total Stock Market - until last year.  Morningstar reports a 6-month average premium/discount of -5.42%, and a 3-year premium/discount of 0.52% for GTU.  So obviously the recent drop in gold prices has exacerbated the discount for GTU.  A buy signal

So, I don't understand where you would get a 40% underperformance of GTU to GLD/IAU, unless it is an artifact of the start date as PS suggests.

WildAboutHarry wrote: Who would not buy assets at a discount?

Apparently, right now, a lot of people are not buying GTU even though the discount has been high for many months.  My understanding is that basically the premium/discount reflects the current popularity of the fund.  Right now it's not popular, so the discount is high.  All the better for us who are trying to buy low and sell high.

WildAboutHarry wrote: So, I don't understand where you would get a 40% underperformance of GTU to GLD/IAU, unless it is an artifact of the start date as PS suggests.

[img width=500]http://i.imgur.com/FSqnxgO.png[/img]

stuper1 wrote:

WildAboutHarry wrote: Who would not buy assets at a discount?

Apparently, right now, a lot of people are not buying GTU even though the discount has been high for many months.  My understanding is that basically the premium/discount reflects the current popularity of the fund.  Right now it's not popular, so the discount is high.  All the better for us who are trying to buy low and sell high.

And how will GTU become "popular" when it has underperformed IAU by 40% over the past 5 years. That is more than a simple rounding error. I still haven't heard a good explanation to account for it.

Since the price of GTU reflects the premium/discount, what we really need to see is a NAV chart.  The GTU site currently shows about a 5% discount to NAV.

There is no way, and I mean no way, that the NAV or the adjusted price could have separated 40% from GLD.  Well, almost no way.

Since GTU can issue new shares, and since it has in the past, I suspect that there may be some sort of share count or dilution effect going on in the price data.

Here is what Morningstar has to say about GTU:

Investors investing in a gold fund should expect high correlation to the spot price of gold, and on a net asset value basis this trust has delivered on that expectation. This isn't surprising, as the fund invests in nothing but gold bullion, primarily in bar form, and has a relatively low expense ratio. Over five-year rolling periods dating back to the fund's U.S. launch in September 2006, the fund has outperformed the average closed-end fund and exchange-traded fund peer in every period on a Morningstar Risk-Adjusted basis. For these reasons, it has earned a Morningstar Analyst Rating of Bronze. It's worth considering for investors seeking to replicate the returns of gold bullion prices.

stockcharts.com shows a chart where you can vary the dates, see

http://stockcharts.com/freecharts/perf.php?GTU,gld

There's a teeny, tiny window where the start date is in early April of 2009 where GTU's 5 year return lags GLD's by a significant amount - all due to an extreme (short lived) aberration in GTU's premium.  There's a 5-year premium/discount chart (in the "Pricing Information" tab) at

http://www.cefconnect.com/Details/Summa ... Ticker=GTU

In early April 2009 GTU's premium briefly spiked up to over 30%.

Moral: don't buy GTU if the premium is 30% (well, duh).

Edit: At cefconnect, the premium/discount chart is in the "Pricing Information" tab

Closed ended funds are fine for speculative purposes, but their often dramatic premium/discount induced price swings are caused by a variety of factors not always tied to the price of bullion. Consequently they can screw up the balance in your PP. And so, at the risk of repeating a point I have made ad nauseam, closed ended funds don't track the price of gold and do not belong in a PP.

I asked about this a little while ago with no reply:

http://gyroscopicinvesting.com/forum/go ... /#msg88974


The internet archive for Feb 20, 2009 shows that indeed the premium was a whopping 23.2%.  I'm not sure why on earth anyone would purchase at that premium.

https://web.archive.org/web/20090223044 ... _value.htm

Ad Orientem wrote: Closed ended funds are fine for speculative purposes, but their often dramatic premium/discount induced price swings are caused by a variety of factors not always tied to the price of bullion. Consequently they can screw up the balance in your PP. And so, at the risk of repeating a point I have made ad nauseam, closed ended funds don't track the price of gold and do not belong in a PP.

Closed end funds don't closely track the price of gold, however they're tremendously simpler entities than the gold ETFs.  They're very boring - they buy gold, they put it in a vault, they issue shares backed by this gold, and that's it.  How much the market values these shares is up to the market.  The ETFs on the other hand are tremendously complicated entities.  They're constantly issuing and destroying shares, based on the promise (to their authorized participants - not you) that they'll trade shares for gold and vice versa at a perpetually decreasing gold/share ratio (perpetually decreasing to cover their expenses).  The number of people who quite literally have their hands on the gold "stored" in an ETF is not small (the custodian, sub-custodians the custodian can generally choose without any disclosure whatsoever, essentially all the authorized participants which is generally at least a dozen or so firms). 

Consequently what you actually own when you buy shares of a gold ETF is pretty far removed from a fixed amount of gold.  You own a claim check an authorized participant can buy which they (the AP, not you) can turn into some (slowly decreasing) amount of gold. This all works great unless an authorized participant, or the custodian, or some sub-custodian turns into this year's MF Global. 

An AP could borrow half the issued shares of an ETF (as many shares as are held by funds or brokerages willing to loan them), trade these shares for half the gold held by the ETF, default on the loans, and the gold would be gone.  At the risk of repeating a point I have made ad nauseam, ETFs have far more moving parts than the closed end funds and are therefore not as safe.  They provide the illusion of being closely linked to the price of gold, but this illusion has not be tested under stress.  It might hold up.  But it might not.  What do you think?  Feel lucky?

IMO, if you pay attention to the premium/discount the closed end funds are perfectly fine for the gold portion of a PP - arguably better than the gold ETFs.

And yet, how could they underperform the ETFs by a margin of 40% over the past 5 years?

dragoncar wrote: The internet archive for Feb 20, 2009 shows that indeed the premium was a whopping 23.2%.  I'm not sure why on earth anyone would purchase at that premium.

https://web.archive.org/web/20090223044 ... _value.htm

I'd happily sell though.

Reub wrote: And yet, how could they underperform the ETFs by a margin of 40% over the past 5 years?

As long as you don't buy GTU when the premium is high, you shouldn't see any underperformance.

Sorry but I can't just write off a 40% underperformance on a fund that is supposed to track GLD for ANY period of time.

Reub wrote: Sorry but I can't just write off a 40% underperformance on a fund that is supposed to track GLD for ANY period of time.

+1

I'm more worried that IAU/GLD will underperform under stress than I am about GTU.  Who knows if IAU/GLD actually hold all the gold that they are supposed to hold?  I do have some IAU, but I also have some GTU and some PHYS.

Besides holding Physical gold in your own possession, I see GTU as a great way to invest in gold. I have been a holder of GTU for a long time, The premium and discount have always worked to my advantage, A person who follows the Permanent Portfolio will be the person who buys at a discount,(when an asset is out of favor)and sells at a premium(when an asset is in favor).  When it is time to re-balance this works for us, The tax advantages and the low expense are also benefits. 

GTU once again .4% lower than GLD and IAU on an up day! How is this regular underperformance explained again?

Reub wrote: GTU once again .4% lower than GLD and IAU on an up day! How is this regular underperformance explained again?

Day-to-day fluctuations are just noise.