Tracking the Gold Funds
Brad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are in the market for a paper investment in gold, there are several factors you may want to take into account in choosing among the many available investment vehicles: fund expense ratio, premium over the NAV, tax issues, who holds the physical gold underlying the fund, who audits those holdings, where they are located, and the potential for convertability of your shares in to physical gold, to name a few. One important factor we attend to at Intelledgement is the overall performance of the fund relative to the price of gold. The following table ranks several gold funds with respect to how well they measure up:
| MarketCap | Volume | Inception | Cost |
29-Dec-11 Price |
ROI |
CAGR |
Gold Cost |
Gold Price |
Gold ROI |
Gold CAGR |
Annualized ITR |
||
| ProShares UltraShort Gold ETF | GLL | 0.14 | 0.92 | 04-Dec-08 | 130.00 | 20.28 | -84.4% | -45.4% | 767.00 | 1545.00 | 101.4% | 25.6% | 5.8 |
| Sprott Physical Gold Trust ETV | PHYS | 2.00 | 1.48 | 26-Feb-10 | 9.59 | 13.72 | 43.1% | 21.5% | 1117.50 | 1545.00 | 38.3% | 19.3% | 2.2 |
| Central GoldTrust | GTU | 0.97 | 0.13 | 22-Sep-06 | 21.95 | 58.07 | 164.6% | 20.3% | 588.60 | 1545.00 | 162.5% | 20.1% | 0.2 |
| ETFS Physical Swiss Gold Shares | SGOL | 1.88 | 0.16 | 09-Sep-09 | 98.98 | 153.19 | 54.8% | 20.9% | 992.50 | 1545.00 | 55.7% | 21.2% | (0.3) |
| iShares Gold Trust | IAU | 9.63 | 5.92 | 28-Jan-05 | 4.27 | 15.07 | 253.0% | 20.0% | 426.80 | 1545.00 | 262.0% | 20.4% | (0.4) |
| SPDR Gold Shares | GLD | 72.87 | 9.99 | 18-Nov-04 | 44.38 | 150.34 | 238.8% | 18.7% | 443.70 | 1545.00 | 248.2% | 19.2% | (0.5) |
| PowerShares DB Gold Fund | DGL | 0.50 | 0.13 | 05-Jan-07 | 23.49 | 53.87 | 129.3% | 18.1% | 605.50 | 1545.00 | 155.2% | 20.7% | (2.6) |
| ProShares Ultra Gold | UGL | 0.43 | 0.28 | 04-Dec-08 | 24.27 | 77.31 | 218.5% | 45.9% | 767.00 | 1545.00 | 101.4% | 25.6% | (5.4) |
| PowerShares DB Gold Double Lg ETN | DGP | 0.67 | 0.90 | 28-Feb-08 | 25.70 | 46.34 | 80.3% | 16.6% | 971.00 | 1545.00 | 59.1% | 12.9% | (9.1) |
MarketCap = size of the fund in billions of dollars.
Volume = daily average trading volume in millions of shares
Inception = date of first day of trading for fund (per Yahoo!)
Cost = closing price of a share of the fund on the first day of trading (per Yahoo!)
29-Dec-11 price = closing price of a share of the fund as of 29 Dec 2011
ROI = return on investment for a share of the fund from the inception date until 29 Dec 2011
CAGR = compounded annual growth rate (a/k/a annualized ROI) for a share of the fund from the inception date until 29 Dec 2011
Gold Cost = closing price of an ounce of gold on the first day of trading for the fund
Gold Price = closing price of an ounce of gold as of 29 Dec 2011
Gold ROI = return on investment for an ounce of gold from the inception date of the fund until 29 Dec 2011
Gold CAGR = compounded annual growth rate for an ounce of gold from the inception date of the fund until 29 Dec 2011
Annualized ITR = the fund’s Intelledgement Tracking Rating (see below)
Basically, the higher the ITR, the better. The ITR is calculated by subtracting the CAGR of gold from the CAGR of the fund; each ITR point is equal to one percentage point of compounded annual growth rate performance. All these funds are supposed to track the price of gold; if a fund has a positive ITR, it has done better than expected while a negative ITR means the fund is underperforming gold.
The ProShares UltraShort Gold ETF (NYSEMKT: GLL) is something of a special case; it is a fund that is supposed to perform inversely compared to the price of gold…actually, it is supposed to go up by twice the percentage decline in the price of gold in any given day that gold sells off…and go down by twice the percentage gain in the price of gold any day that gold appreciates in value. The fund has a high ITR because while gold has increased by 25.6% on a CAGR basis since the inception of the fund, GLL has declined by a CAGR of “only” 45.4%. As we would have expected a decline of 51.2%, GLL has, relatively speaking, outperformed. Of course, anyone who bought a share of the fund back on 4 Dec 2008 and held it through yesterday is still down 84.4% overall, so the good ITR rating is probably not particularly comforting.
Generally speaking, we would expect the ITR for a fund tracking the price of gold to be slightly negative, given that the cost of administering the fund—including buying and selling the underlying gold and storing it for those funds that are backed by physical metal and the transaction costs of trading derivatives and options for the funds that are not—has to be paid for out of the assets of the fund. Therefore the -0.5 ITR of GLD, -0.4 for IAU, and -0.3 for SGOL sound just about right. It does appear that the physical gold funds generally beat the paper gold funds. For example, both of the double-return long funds on the list—which utilize futures and other derivatives to attempt to double the appreciation (or decline) in the price of gold on any given day—have failed to perform as well as expected over the long run (although both are handily beating the ROI of gold). Similarly the PowerShares DB Gold Fund (NYSEMKT: DGL)—which relies on futures contracts to track the price of gold rather than purchasing bullion like GLD or IAU—has a materially worse ITR (-2.6).
The outlier is the Sprott Physical Gold Trust ETV (NYSEMKT: PHYS), which has a +2.2 ITR. PHYS is unique in allowing, theoretically, investors to redeem their shares for gold bars…but you have to have at least $400,000 or so because they utilize gold bars and they won’t split one up for you. It is also structured as a closed-end mutual fund that affords US taxpayers the advantage of paying capital gains taxes at the long-term rate (15%), unlike the other funds (gains from which are taxed at 28%). The fund has generally sold at a premium to the NAV—which both means it is in high demand and if you invest in it, you are in effect paying higher-than-market-rates for your gold. It will be interesting to see if the relative attractiveness of the fund enables it to sustain the better-than-expected performance.
Brad Hessel is a registered investment advisor based in North Carolina; the name of his firm is Intelledgement, LLC. Brad owns shares of GLD, but he is currently advising his clients to sell any GLD they have and replace those shares with equivalent value of PHYS. He expects to follow suit early in January (the delay reflecting congruence with TMF’s trading guidelines).
