GTU, GLD, SGOL, etc

[Wonk]

After doing some research comparing GTU to GLD and SGOL, I picked up on something interesting.  GTU is a closed end fund, so there are fluctuations in the net asset value.  This is nothing new.  For the most part, GTU will track GLD and SGOL closely except for times when gold momentum gets frothy.  During those times, the net asset value premium will sometimes exceed 15-20%.  Occasionally there will be a new offering by GTU, which will give the premium a haircut.  When the gold market is steady again, GTU will track GLD and SGOL pretty closely again.

Lesson: Do not buy GTU when net asset value premiums are high (7%+) or you will get snipped once values are more aligned.  A good all-physical substitution is SGOL.  I don't like GLD but that is my preference--others feel differently.  I do like GTU for its track record and geographic diversification.  Just be careful to check the net asset value before buying:

http://www.gold-trust.com/asset_value.htm

One addition: To see what I'm referencing, go to yahoo finance and bring up a 2 yr chart on GTU.  Use the "compare" function to overlay GLD with GTU.  Notice the difference in performance during momentum swings.

[MediumTex]

Wonk,

I wonder why people don't just sell GTU when the premium is high and buy back in when the premium is low.

For example, start off with 50% position in GTU and GLD.  Since they are both tracking the price of the same thing (gold), they should move together.  However, GTU will sometimes fluctuate above and below the 50% threshold as a result of the premium, while GLD will track the price of gold more accurately.

Why is this not a simple trading opportunity?

Personally, I wouldn't buy any GTU just because I don't understand all of the dynamics of the premium and discount to NAV, but I understand that in theory it should be safer than GLD.

[Wonk]

MT,

It does appear to be a nice arbitrage opportunity for traders.  I'm sure there are people doing this already although if I tried I'd be a whiffle ball player matching up with Steven Strasburg.    The entry is easy but the exit is not.

[hogtied]

here's another thing:
"the Canada-based fund, Central GoldTrust (GTU on the NYSE) is structured as a trust that invests in audited physical gold held in the treasury vaults of the Canadian Imperial Bank of Commerce. It does not promise to make physical distributions of gold under certain circumstances, as GLD does. Therefore it is not a “collectible”?. It qualifies as a passive foreign investment company with the IRS. You can make a qualified fund election by filing form 8621 (a 1-page form). This means you get the 15% standard long-term capital gains treatment and not the 28% collectable tax."

[hogtied]

GTU premium today was 3.82%, relatively low compared to the 52 week average of 6.25%

[herbgoat]

I have a question about form 8621. Do you only have to fill out the form for the year you sell GTU? Do you have to file the form for every year for which you sold any shares of GTU?

[Wonk]

I have a question about form 8621. Do you only have to fill out the form for the year you sell GTU? Do you have to file the form for every year for which you sold any shares of GTU?

That's a question for your tax advisor.

[foglifter]

I found an interesting analysis of various gold investment options available today, it compares fund structure, tax treatment etc. The recommendation is basically to choose SGOL, which stores gold in Switzerland. Nothing bad said about IAU though, and given the recent expense ratio cut I wonder if IAU can be considered a good option. According to prospectusIAU gold can be all over the place: "New York, Toronto, London and other locations that can be authorized in the future".

[craigr]

I found an interesting analysis of various gold investment options available today, it compares fund structure, tax treatment etc. The recommendation is basically to choose SGOL, which stores gold in Switzerland. Nothing bad said about IAU though, and given the recent expense ratio cut I wonder if IAU can be considered a good option. According to prospectusIAU gold can be all over the place: "New York, Toronto, London and other locations that can be authorized in the future".

That was a good write-up on the gold ETF options. Although it is much harder today to open an account overseas for gold storage, it is nice to have the market providing these options.

[Pkg Man]

Great article foglifter. I liked the recommendation below, which is what I do.

So what’s the solution? Exactly this: diversify your risk.
?Spread your gold holdings around. Store your coins in more than one location and own more than one gold fund.

And the portfolio allocation was just one investment shy of being the PP.  Interesting.

[steve]

Quote from: herbgoat on July 24, 2010, 09:37:31 AM
"I have a question about form 8621. Do you only have to fill out the form for the year you sell GTU? Do you have to file the form for every year for which you sold any shares of GTU?"



For my Gold allocation I have percentage in bullion and a percentage in GTU to make it easy to rebalance. The way I do it, which may or may not be the best way for you is,   (from my notes)

1.   Check box A in Part I of Form 8621.
2.   Complete the applicable lines of Part II. Include the information provided in the PFIC Annual Information Statement received from the PFIC. (GTU has this on their website)
3.   Attach Form 8621 to a timely filed tax return


The first year I buy a Passive Foreign Investment Company (PFIC)  I make the  "QEF" election on Form 8621, and attach a statement showing my share balance at the beginning of the year, end of the year, and on any date when shares are added or sold shares (ATTACHMENT TO FORM 8621).  I file this with my income tax.
As far as I understand it :
A QEF Election will apply to the taxable year for which such QEF Election is made and to all subsequent taxable years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election.

For each subsequent tax year in which the election applies and the corporation is treated as a QEF, the shareholder must:
1.   Complete the applicable lines of Part II and
2.   Attach Form 8621 to a timely filed tax return. I include updated
(ATTACHMENT TO FORM 8621)