Macro Tsimmis

intelligently hedged investment

Tracking the Gold Funds

Posted by intelledgement on Fri, 30 Dec 11

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 convertibility 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:

Fund  Sym. Market Cap 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 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 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 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 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 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 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 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 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 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 (AMEX: 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 (AMEX: 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 (AMEX: 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.

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One Response to “Tracking the Gold Funds”

  1. This article is cross-posted on The Motley Fool Blog Network: http://beta.fool.com/bhessel/2012/01/06/tracking-gold-funds/

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