GTU Is The Ideal PP ETF

Discussion of the Gold portion of the Permanent Portfolio

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GTU Is The Ideal PP ETF

Post by TripleB » Sun Jan 18, 2015 1:44 am

GTU, in my current opinion, is the ideal PP ETF. I hadn't thought too much about it until I read the thread in this sub forum about it's NAV. Being a closed-end fund, GTU can trade at either a premium or a discount to it's underlying holdings. The extent of this NAV differential is based on market forces.

Consider how gold assets in your PP work. If gold goes up, you hit your 35% band and sell some of it. If gold goes down, you hit your 15% band and buy some of it.

At the times when gold is going up, GTU is expected to trade at a premium to the NAV because there's positive sentiment to gold and it's favored by the market.

At times when gold is going down, GTU is expected to trade at a discount to the NAV because there's negative sentiment to gold and the market forces are pushing the fund price down.

Given the above, GTU is ideal for the PP because you're generally selling it at a premium to the NAV and buying it at a discount to the NAV.

Once I realized this last month, I sold half of my gold ETF holdings (split 50-50 between IAU and SGOL), and bought GTU at about a 10% discount to the NAV. Today, it's a 6% discount to the NAV so I gained 4% on top of the underlying gold gains.

Assuming gold keeps going up, the fund will trade at a smaller and smaller discount, eventually trading at a slight premium to NAV. By that time, I'll hit a rebalancing point and sell, locking in my gains.

Or, gold will reverse direction and drop back down again, and hit a 10% discount once more, and when I hit my rebalancing band, I buy back in at the 10% discount to the NAV.

In essence, it's almost like having leveraged ownership of gold, but without the downside of margin calls. GTU moves more dynamically downward and upward more than gold, because of market sentiment related to NAV. This seems as though it would be significantly beneficial because as gold goes up, you will reach your 35% point more quickly (as the 10% discount becomes a 2% premium, which is a 12% boost in addition to the increase of gold), and reaching your rebalancing point faster means you lock in gains faster. Conversely, as gold falls, and the discount becomes bigger, you lose money faster and reach rebalancing faster, buy more at the bigger discount.

Imagine there was a financial instrument that did 1.5x the stock market, in either direction, but there was no cost associated with that leverage. That would be significant and help the HBPP equity portion greatly. Similarly, if the US Government issued 50-year treasury bonds, they would be significantly more volatile than 30-years, and using the 50's in your long-term bond position would result in maybe 1.5x moves in either direction from using 30's, but without any leverage costs associated with that greater volatility. This would make the total portfolio much stronger.

While the above sound confident, I'm still skeptical of GTU, have not read the prospectus fully in detail, don't understand how it works, and may liquidate my GTU, locking in my 4% gain this week, and buy back IAU and SGOL.

My biggest concern with GTU is that I don't think there's anyway to access the gold. With many funds, if you buy enough shares, you can liquidate them and take possession of the gold (for a fee). Even if that's beyond the capability of the average investor, it means there's big players with large assets doing arbitrage to ensure my shares are worth something congruent to gold. With GTU, from what I've heard, you can't do that, and it's just gold sitting in a vault, and it's owned by a fund, and you own a piece of that fund, but you can't access the gold, so the shares are only worth whatever someone who wants to own the shares will pay for that digital ownership right.

Please tell me I'm being an asshole and I got lucky and to lock in my 4% gains and explain why my logic is faulty. Or tell me this makes perfect sense and am a genius and send me $10 to subscribe to my investing newsletter.

The main unknown is what the maximum discount of GTU can be. It's been 10% at the lowest in recent years. With some funds, it can't drop below a 10% discount because the fund is structured so arbitrage can occur and gold gets liquidated from the holdings. With GTU, that may not be the case.
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Re: GTU Is The Ideal PP ETF

Post by bronsuchecki » Sun Jan 18, 2015 2:52 am

How far back have you gone to test the relationship between premium/discount and gold price, has it held up over time? I would note that generally if the premium grows then there is an incentive for the fund managers to issue new share, which will tend to cap how big the premium gets. It would be interesting to see if GTU has done this. On the downside however if there isn't any redemption for physical option to professional players then there is no limit to how big a discount it could go for, in such case you have capped premium but open ended downside discount.

Compare to Sprott's PHYS, which has a physical redemption option and I've watching it and have seen physical taken out by some professional players any time the discount gets to big, so it seems to have a capped downside discount. On the issuance when there is premium, if you look at PSLV Sprott has issued new shares when the premium got above 4% or so. If you're interested in that I've blogged on Sprott's funds a lot, just search on "PHYS" or "PSLV" and the posts should come up.

Given the physical redemption option for pro market players I'd probably recommend Sprott's funds rather than GTU as still some premium/discount leverage strategy you noted with Sprott but less risk.
Disclosure: I work for the Perth Mint. What I say is done in a personal capacity and is not endorsed by the Mint.
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Re: GTU Is The Ideal PP ETF

Post by barrett » Sun Jan 18, 2015 6:50 am

This idea is really intriguing, but when I read these GTU threads I always wonder why people talk about the shares "trading at a discount" instead of the shares "underperforming the metal." Yeah, it seems that increased volatility might be a good thing for PP assets, but you have to consider human emotions as well, right? I mean when gold hit the skids in 2013, it was painful for a lot of PP investors and I believe a lot of people dumped the strategy altogether (the massive 2013 run up in stocks made it really difficult that year to feel good about the PP). Wasn't the trip down even tougher for GTU holders? And wasn't the real PP loss for GTU holders even greater than 2% that year?

I guess from my point of view, the three volatile assets of the PP already provide enough drama. So, you might be correct from the point of view of a machine analyzing data, but human emotions have to be taken into account as well. Maybe your GTU rebalancing strategy is great for some and not for others.

Also, TripleB, I think your are talking about hitting rebalancing bands as if it's more or less guaranteed with the increased volatility of GTU. Mind you, my experience with the PP is really limited, but my impression so far is that it can take a really long time to hit a 15/35 band. There would probably be some market timing involved to really rebalance at the ideal times, no?
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Re: GTU Is The Ideal PP ETF

Post by Pointedstick » Sun Jan 18, 2015 9:19 am

I do the same thing, BBB. Of my paper gold, a fraction is SGOL and the remainder is GTU. I buy SGOL because it's commission-free, and when the GTU discount gets to -8%, I sell all the SGOL and replace it with GTU, on the reasoning that my money is buying more shares, enhancing its purchasing power. I haven't sold any GTU yet, but I plan to do so when 1) gold hits a rebalance band (because the premium will probably be positive) and 2) when the discount hits +6%. I remember from back in 2012 when the discount went as high as 10% on occasion. It's definitely happened before when gold was rising.

I like this strategy because it boosts the core logic of the PP, which is to harvest volatility. The more volatility you can get out of your assets without changing them into something else or using leverage, the better. In this regard, switching T-bonds for zeroes or EDV is something I have done in the past as well and should get back to.
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Re: GTU Is The Ideal PP ETF

Post by TripleB » Sun Jan 18, 2015 9:42 am

Where is SGOL commission-free?
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Re: GTU Is The Ideal PP ETF

Post by Pointedstick » Sun Jan 18, 2015 10:03 am

TripleB wrote: Where is SGOL commission-free?
Schwab.
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Re: GTU Is The Ideal PP ETF

Post by rickb » Sun Jan 18, 2015 3:29 pm

bronsuchecki wrote: How far back have you gone to test the relationship between premium/discount and gold price, has it held up over time? I would note that generally if the premium grows then there is an incentive for the fund managers to issue new share, which will tend to cap how big the premium gets. It would be interesting to see if GTU has done this. On the downside however if there isn't any redemption for physical option to professional players then there is no limit to how big a discount it could go for, in such case you have capped premium but open ended downside discount.

Compare to Sprott's PHYS, which has a physical redemption option and I've watching it and have seen physical taken out by some professional players any time the discount gets to big, so it seems to have a capped downside discount. On the issuance when there is premium, if you look at PSLV Sprott has issued new shares when the premium got above 4% or so. If you're interested in that I've blogged on Sprott's funds a lot, just search on "PHYS" or "PSLV" and the posts should come up.

Given the physical redemption option for pro market players I'd probably recommend Sprott's funds rather than GTU as still some premium/discount leverage strategy you noted with Sprott but less risk.
GTU has definitely issued new shares when the premium has gotten high, and (as far as I can tell) there is no way to redeem shares for physical gold - so the premium is to some extent capped to the upside and (at least theoretically) open ended on the downside.  In practice the premium has reached about 32% (briefly in 2009) and the discount about 12% (Nov 2014). 

One issue with PHYS is that because shareholders can redeem for physical, you can be on the hook for "phantom" capital gains taxes.

Some articles:

http://seekingalpha.com/article/1863381 ... gold-trust

http://news.morningstar.com/articlenet/ ... ?id=355386
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Re: GTU Is The Ideal PP ETF

Post by stpeter » Sun Jan 18, 2015 7:48 pm

Pointedstick wrote: I do the same thing, BBB. Of my paper gold, a fraction is SGOL and the remainder is GTU. I buy SGOL because it's commission-free, and when the GTU discount gets to -8%, I sell all the SGOL and replace it with GTU, on the reasoning that my money is buying more shares, enhancing its purchasing power. I haven't sold any GTU yet, but I plan to do so when 1) gold hits a rebalance band (because the premium will probably be positive) and 2) when the discount hits +6%. I remember from back in 2012 when the discount went as high as 10% on occasion. It's definitely happened before when gold was rising.

I like this strategy because it boosts the core logic of the PP, which is to harvest volatility. The more volatility you can get out of your assets without changing them into something else or using leverage, the better. In this regard, switching T-bonds for zeroes or EDV is something I have done in the past as well and should get back to.
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Re: GTU Is The Ideal PP ETF

Post by Libertarian666 » Sun Jan 18, 2015 8:01 pm

It is true that there doesn't seem to be any way for a retail investor, no matter how large his account, to access the physical gold underlying GTU by "normal" means, which to me is a slight drawback.

However, if someone had a billion dollars or so, I think they could buy enough of the shares that they could close out the fund and get the gold. This would probably be irresistible to someone with that much money if the discount got big enough.

Needless to say, I don't expect to be that person, but the possibility of someone's doing that should limit the maximum discount to some extent.
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Re: GTU Is The Ideal PP ETF

Post by dragoncar » Mon Jan 19, 2015 9:00 pm

The only problem is when you are accumulating and GTU is sitting at a premium for many years.  Then I guess you'd buy SGOL or whatever
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Re: GTU Is The Ideal PP ETF

Post by Phalanx » Thu Jan 22, 2015 4:18 pm

I've come to a similar conclusion as PS regarding buying/selling SGOL & GTU at Schwab. The difference in returns in 2008 for GLD & GTU are striking to me: 4.96 vs 26.05, respectively.

Along the same line of "harvesting volatility", I also switched from LTTs into zeroes. Although I'd prefer EDV, ZROZ is commission-free at Schwab. Yes, I'm aware of HB's argument against zeroes.
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Re: GTU Is The Ideal PP ETF

Post by Pointedstick » Thu Jan 22, 2015 6:47 pm

Phalanx wrote: ZROZ is commission-free at Schwab. Yes, I'm aware of HB's argument against zeroes.
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Re: GTU Is The Ideal PP ETF

Post by TripleB » Thu Jan 22, 2015 8:16 pm

Based on some of the replies and thinking more about it, I've decided against GTU as a core holding. Primarily because there's no guarantee I'll only be buying it when the discount is 10% and only be selling it when the premium is 2%.

Here's a scenario. Suppose my HBPP looked like this on a hypothetical day:

19% Gold
34% Stocks
17% Bonds
30% Cash

And the stock market rises enough to reach 35% of my portfolio and trigger rebalancing. But suppose gold is also soaring recently and GTU is at a 2% premium. I'd have to buy a bunch of GTU at premium to go from 19% back to 25%.

Then what if a rebalancing band hits again (possibly from another asset) and GTU is at a 10% discount, but I'm at 30% gold and need to sell. I will be forced to lock in a loss at that discount.

I think GTU does make sense if you only buy it at a large discount (possibly by swapping some IAU/SGOL/GLD/PHYS for GTU during a non-rebalancing band time), and then sell it when the discount shrinks and lock in your premium/discount gain.
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Re: GTU Is The Ideal PP ETF

Post by Pointedstick » Thu Jan 22, 2015 9:00 pm

TripleB wrote: Based on some of the replies and thinking more about it, I've decided against GTU as a core holding. Primarily because there's no guarantee I'll only be buying it when the discount is 10% and only be selling it when the premium is 2%.

Here's a scenario. Suppose my HBPP looked like this on a hypothetical day:

19% Gold
34% Stocks
17% Bonds
30% Cash

And the stock market rises enough to reach 35% of my portfolio and trigger rebalancing. But suppose gold is also soaring recently and GTU is at a 2% premium. I'd have to buy a bunch of GTU at premium to go from 19% back to 25%.
So in that situation, I would buy SGOL instead.
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Re: GTU Is The Ideal PP ETF

Post by Libertarian666 » Thu Jan 22, 2015 9:59 pm

Pointedstick wrote:
TripleB wrote: Based on some of the replies and thinking more about it, I've decided against GTU as a core holding. Primarily because there's no guarantee I'll only be buying it when the discount is 10% and only be selling it when the premium is 2%.

Here's a scenario. Suppose my HBPP looked like this on a hypothetical day:

19% Gold
34% Stocks
17% Bonds
30% Cash

And the stock market rises enough to reach 35% of my portfolio and trigger rebalancing. But suppose gold is also soaring recently and GTU is at a 2% premium. I'd have to buy a bunch of GTU at premium to go from 19% back to 25%.
So in that situation, I would buy SGOL instead.
Exactly. Buy GTU when it is at a discount; sell it and buy something else if it is at a premium. In fact, you don't even have to wait for a rebalancing event to do the latter. Or the former, if you have something else to sell that doesn't have a discount.
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Re: GTU Is The Ideal PP ETF

Post by Ad Orientem » Fri Jan 23, 2015 3:33 pm

GTU is an attractive way to speculate in gold, but as I have said ad infinitum, it really is not appropriate for a PP. It does not track the price of gold because it's a closed ended fund and is subject to all sorts of swings in discount/premium often exacerbated by investor sentiment. Thus it can skew your PP and cause you to rebalance at inappropriate times.

Stick to physical or, if you must, an ETF for your PP and leave the closed ended funds for your VP.
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Re: GTU Is The Ideal PP ETF

Post by Libertarian666 » Fri Jan 23, 2015 3:44 pm

Ad Orientem wrote: GTU is an attractive way to speculate in gold, but as I have said ad infinitum, it really is not appropriate for a PP. It does not track the price of gold because it's a closed ended fund and is subject to all sorts of swings in discount/premium often exacerbated by investor sentiment. Thus it can skew your PP and cause you to rebalance at inappropriate times.

Stick to physical or, if you must, an ETF for your PP and use the closed ended funds for your VP.
I still don't see the problem in buying GTU at a fairly large discount, e.g., 9-10%. Of course one day it may fail to recover to "par", but I see no a priori reason to expect that to happen, given its history. I certainly wouldn't buy it at a premium, but at a sizable discount I like it.
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Re: GTU Is The Ideal PP ETF

Post by dragoncar » Fri Jan 23, 2015 3:47 pm

Ad Orientem wrote: GTU is an attractive way to speculate in gold, but as I have said ad infinitum, it really is not appropriate for a PP. It does not track the price of gold because it's a closed ended fund and is subject to all sorts of swings in discount/premium often exacerbated by investor sentiment. Thus it can skew your PP and cause you to rebalance at inappropriate times.

Stick to physical or, if you must, an ETF for your PP and use the closed ended funds for your VP.
How would buying when investor sentiment is low and selling when investor sentiment is high be rebalancing at "inappropriate times"
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Re: GTU Is The Ideal PP ETF

Post by Libertarian666 » Fri Jan 23, 2015 3:50 pm

dragoncar wrote:
Ad Orientem wrote: GTU is an attractive way to speculate in gold, but as I have said ad infinitum, it really is not appropriate for a PP. It does not track the price of gold because it's a closed ended fund and is subject to all sorts of swings in discount/premium often exacerbated by investor sentiment. Thus it can skew your PP and cause you to rebalance at inappropriate times.

Stick to physical or, if you must, an ETF for your PP and use the closed ended funds for your VP.
How would buying when investor sentiment is low and selling when investor sentiment is high be rebalancing at "inappropriate times"
Good question!
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Re: GTU Is The Ideal PP ETF

Post by Ad Orientem » Fri Jan 23, 2015 3:53 pm

dragoncar wrote:
Ad Orientem wrote: GTU is an attractive way to speculate in gold, but as I have said ad infinitum, it really is not appropriate for a PP. It does not track the price of gold because it's a closed ended fund and is subject to all sorts of swings in discount/premium often exacerbated by investor sentiment. Thus it can skew your PP and cause you to rebalance at inappropriate times.

Stick to physical or, if you must, an ETF for your PP and use the closed ended funds for your VP.
How would buying when investor sentiment is low and selling when investor sentiment is high be rebalancing at "inappropriate times"
Because you are not using gold for the fourth asset in your PP. You are using gold on steroids, which can cause you to buy or sell some of the other assets before their time. You are adding a level of volatility that is sufficiently greater than the other assets such that it could significantly skew your PP's performance.

EDIT: It's a bit like substituting EDV for your LTTs.
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Re: GTU Is The Ideal PP ETF

Post by dragoncar » Fri Jan 23, 2015 4:08 pm

Ad Orientem wrote:
dragoncar wrote:
Ad Orientem wrote: GTU is an attractive way to speculate in gold, but as I have said ad infinitum, it really is not appropriate for a PP. It does not track the price of gold because it's a closed ended fund and is subject to all sorts of swings in discount/premium often exacerbated by investor sentiment. Thus it can skew your PP and cause you to rebalance at inappropriate times.

Stick to physical or, if you must, an ETF for your PP and use the closed ended funds for your VP.
How would buying when investor sentiment is low and selling when investor sentiment is high be rebalancing at "inappropriate times"
Because you are not using gold for the fourth asset in your PP. You are using gold on steroids, which can cause you to buy or sell some of the other assets before their time. You are adding a level of volatility that is sufficiently greater than the other assets such that it could significantly skew your PP's performance.

EDIT: It's a bit like substituting EDV for your LTTs.
Wouldn't you substitute 50 year bonds for the 30 year bonds if you could?
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Re: GTU Is The Ideal PP ETF

Post by Ad Orientem » Fri Jan 23, 2015 4:15 pm

dragoncar wrote:
Ad Orientem wrote:
dragoncar wrote: How would buying when investor sentiment is low and selling when investor sentiment is high be rebalancing at "inappropriate times"
Because you are not using gold for the fourth asset in your PP. You are using gold on steroids, which can cause you to buy or sell some of the other assets before their time. You are adding a level of volatility that is sufficiently greater than the other assets such that it could significantly skew your PP's performance.

EDIT: It's a bit like substituting EDV for your LTTs.
Wouldn't you substitute 50 year bonds for the 30 year bonds if you could?
No I would not. The PP is predicated on a roughly comparable level of volatility among the three non-cash assets. If one asset becomes vastly more volatile than the others, you are going to get an unbalanced portfolio.
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Re: GTU Is The Ideal PP ETF

Post by dragoncar » Fri Jan 23, 2015 4:33 pm

Ad Orientem wrote:
dragoncar wrote:
Ad Orientem wrote: Because you are not using gold for the fourth asset in your PP. You are using gold on steroids, which can cause you to buy or sell some of the other assets before their time. You are adding a level of volatility that is sufficiently greater than the other assets such that it could significantly skew your PP's performance.

EDIT: It's a bit like substituting EDV for your LTTs.
Wouldn't you substitute 50 year bonds for the 30 year bonds if you could?
No I would not. The PP is predicated on a roughly comparable level of volatility among the three non-cash assets. If one asset becomes vastly more volatile than the others, you are going to get an unbalanced portfolio.
Isn't the bond component the least volatile (by far) of the three non-cash assets?
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Re: GTU Is The Ideal PP ETF

Post by Ad Orientem » Fri Jan 23, 2015 4:47 pm

dragoncar wrote:
Ad Orientem wrote:
dragoncar wrote: Wouldn't you substitute 50 year bonds for the 30 year bonds if you could?
No I would not. The PP is predicated on a roughly comparable level of volatility among the three non-cash assets. If one asset becomes vastly more volatile than the others, you are going to get an unbalanced portfolio.
Isn't the bond component the least volatile (by far) of the three non-cash assets?
Maybe or maybe not. Exact parity in volatility is not possible. The objective is to not grossly overweight one asset. And I would note that LTTs pretty much did what they were supposed to during the shit storm of 2008-09.
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Re: GTU Is The Ideal PP ETF

Post by dragoncar » Fri Jan 23, 2015 4:52 pm

Ad Orientem wrote:
dragoncar wrote:
Ad Orientem wrote: No I would not. The PP is predicated on a roughly comparable level of volatility among the three non-cash assets. If one asset becomes vastly more volatile than the others, you are going to get an unbalanced portfolio.
Isn't the bond component the least volatile (by far) of the three non-cash assets?
Maybe or maybe not. Exact parity in volatility is not possible. The objective is to not grossly overweight one asset. And I would note that LTTs pretty much did what they were supposed to during the shit storm of 2008-09.
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