Please explain why anyone wants GTU if no redemption option??

Discussion of the Gold portion of the Permanent Portfolio

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coinstar
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Please explain why anyone wants GTU if no redemption option??

Post by coinstar » Thu Apr 16, 2015 1:08 am

I have been reading with great interest about GTU on these forums and I just don't get why it trades at such a discount (30% below NAV in 2009!!) and 8% below NAV today.

I read about the proxy fight to establish rules to allow redemption. Which leads me to believe no redemption is possible. So basically, if I understand this right, when GTU was created, investors threw in a bunch of cash to buy gold and store the gold in a safe. And no one can ever get the gold out. So all the investors have is pieces of paper that say they have fractional ownership of the gold in the safe that no one can ever access.

So why does anyone want these pieces of paper? It seems reasonable that GTU would drop to the exact discount where someone could buy ALL of the shares at that discount and then liquidate the whole thing and take the gold. Or at least majority shares and vote on it and win.

Seriously if it was trading at 30% to NAV in 2009 why didn't a hedge fund with 100 Billion Dollars walk in, buy the whole thing (I think it's only $300M total??), liquidate and make a nice profit? Of course, if the NAV discount is 30% and someone tried to buy 51% of the shares in any short period of time, it would drive the NAV discount down as it drove the market price up. But at a 30% discount to NAV, it would still seem like someone could make a profit doing it.

Can someone explain the appeal of this type of structure as opposed to the regular ETF structure where people can redeem for gold (for a fee of course)? It seems like the ETFs that let you redeem for gold always basically track the price of gold with no significant NAV discount/premium. And isn't that what we want?
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MWKXJ
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Re: Please explain why anyone wants GTU if no redemption option??

Post by MWKXJ » Thu Apr 16, 2015 3:02 am

coinstar wrote: Can someone explain the appeal of this type of structure as opposed to the regular ETF structure where people can redeem for gold (for a fee of course)? It seems like the ETFs that let you redeem for gold always basically track the price of gold with no significant NAV discount/premium. And isn't that what we want?
Ownership of GTU entitles the shareholder to a slice of the pie should Gold Trust's assets become liquidated.  Shareholders receive the assets of the fund after holders of senior debt receive their share, and as far as I'm aware, GTU does not carry bond debt and does not issue preferred shares (as it has no dividend).

The recent proxy fight with Polar surfaced precisely because the market price of GTU has become so cheap relative to its assets.  Discounts reveal "weakness" and encourage activists to "unlock" a CEF's market potential.  It happens all the time, whether with Adams Express, General American Investors, Tri-Continental, or the myriad of historic CEFs that were open-ended by activists and gutted.  Persistent discounts bring the sharks circling.

GTU, however, has traded at a premium as recently as three or four years ago, which is hardly "persistent" in the CEF universe.  The discount and premium swings of closed end funds are a definite advantage for those who believe that the market periodically oscillates between undervaluing and overvaluing assets owned by a fund.  It can be a gamble deciding whether the typical stock holding CEF is overvalued or undervalued, despite the advertised discounts, as one must delve into the P/E and P/B ratios of the individual companies held by a closed end fund because unlike ETFs, CEFs are not index based.  Bond CEFs would be somewhat easier to value if the use of leverage was not so widespread; the value of a leveraged bond portfolio is tempered by the fact that what is owned is owned with potentially risky debt.  Compared to stock and bond CEFs, GTU is dead simple.  A vault it Canada holds X ounces of gold, the market value of gold is Y, hence the NAV is Z.  GTU's NAV is a no-brainer.  If GTU is selling at a discount and one also believes that gold will increase in value in the future, one is in effect getting more for their money by buying GTU than a actively adjusted ETF, particularly if one is a PP investor and uses rebalancing bands.

As you mentioned, ETFs "track" their indexes, constantly buying or selling in order to avoid premiums and discounts.  This introduces complexity to the management of the fund.  Should Polar allow hedge fund investors to withdraw gold directly from Gold Trust, GTU would in effect become an open-end fund by definition; the fund would no longer be comprised of fixed number of shares which are not redeemable from the fund.

As to why anyone would invest in a CEF vehicle:  The objections to closed end funds would in an honest market also be applied to the dividend-less "growth" stocks which are all the rage today.  Rather than existing in a profit sharing relationship with the company through dividends, the holder of growth stock shares is in reality in an adversarial relationship with the issuing company; it is in the company's interest to keep the value of its share priced high enough to prevent leveraged buyouts by competitors.  After the initial capital gained from selling shares, companies thereafter fear shares on the market, as if too many shares land in one basket the company is no longer the property of its directors.  Hence growth companies employ buybacks to prevent large numbers of shares from being "scooped up" cheaply on the market.  The wild discounts and premiums of CEFs lead to similar fears for its directors, but can also lead to opportunities for investors if they believe the NAV and see a bright future for the fund's holdings.
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Re: Please explain why anyone wants GTU if no redemption option??

Post by Pet Hog » Thu Apr 16, 2015 1:48 pm

Beautiful post, MWKXJ.  You seem to know your stuff when it comes to CEFs.  So can I ask why do you (or anyone else if they care to chime in) think the discount on the NAV for GTU is so large (>8% today)?
MWKXJ wrote: Compared to stock and bond CEFs, GTU is dead simple.  A vault it Canada holds X ounces of gold, the market value of gold is Y, hence the NAV is Z.  GTU's NAV is a no-brainer.
I suspect nobody on this board is selling their shares at such a discount (only buying them), and I assume a similar level of intelligence for non-PPers, and I'm led to believe that the quants at the investment firms are all physics PhDs, so who with even half a brain (a step up from a no-brainer) would set their ask price so far below the NAV?  Buying a share of GTU is in effect buying a piece of gold that is stored in a vault in Canada.  I don't see much difference between that and, say, buying gold for storage at the Perth Mint.  Except there you have to buy at a premium.  Or buying physical gold at a premium and then paying for insurance and/or a safe deposit box.  Right now the spot price of gold is $1200/oz, AJPM is selling 1-oz American Eagles for $1256, and the equivalent price for GTU (discount of 8%) is $1104/oz.  Why isn't the market rushing in to bid up the price?  What is it that I find so hard to understand about this no-brainer?
Last edited by Pet Hog on Thu Apr 16, 2015 2:25 pm, edited 1 time in total.
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Re: Please explain why anyone wants GTU if no redemption option??

Post by technovelist » Thu Apr 16, 2015 11:28 pm

Pet Hog wrote: Beautiful post, MWKXJ.  You seem to know your stuff when it comes to CEFs.  So can I ask why do you (or anyone else if they care to chime in) think the discount on the NAV for GTU is so large (>8% today)?
MWKXJ wrote: Compared to stock and bond CEFs, GTU is dead simple.  A vault it Canada holds X ounces of gold, the market value of gold is Y, hence the NAV is Z.  GTU's NAV is a no-brainer.
I suspect nobody on this board is selling their shares at such a discount (only buying them), and I assume a similar level of intelligence for non-PPers, and I'm led to believe that the quants at the investment firms are all physics PhDs, so who with even half a brain (a step up from a no-brainer) would set their ask price so far below the NAV?  Buying a share of GTU is in effect buying a piece of gold that is stored in a vault in Canada.  I don't see much difference between that and, say, buying gold for storage at the Perth Mint.  Except there you have to buy at a premium.  Or buying physical gold at a premium and then paying for insurance and/or a safe deposit box.  Right now the spot price of gold is $1200/oz, AJPM is selling 1-oz American Eagles for $1256, and the equivalent price for GTU (discount of 8%) is $1104/oz.  Why isn't the market rushing in to bid up the price?  What is it that I find so hard to understand about this no-brainer?
Two things:
1. There is almost no volume in GTU, so it would be very difficult to buy a significant amount without eliminating the discount.
2. The discount could get a lot bigger, so anyone who might need to sell could be unhappy.

That said, I'm accumulating GTU with new capital as long as it is at a discount. If it gets to a premium, I'll sell and buy something else. I should not have to sell any time in the foreseeable future, so I don't mind the discount growing, if that's what happens.
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Re: Please explain why anyone wants GTU if no redemption option??

Post by rickb » Sat Apr 18, 2015 12:16 am

coinstar wrote: Can someone explain the appeal of this type of structure as opposed to the regular ETF structure where people can redeem for gold (for a fee of course)? It seems like the ETFs that let you redeem for gold always basically track the price of gold with no significant NAV discount/premium. And isn't that what we want?
Actually, the ETFs (at least GLD, as per its FAQ) does not let YOU redeem your shares for gold, only Authorized Participants can do this.  In normal times allowing APs to trade shares for gold means the ETFs have no significant NAV discount/premium.  But GLD is the oldest gold ETF and it's only been around since 2004, so what might happen in abnormal times is not exactly known.

Note that there are some very bad outcomes here.  For example, let's imagine the IMF wants to issue SDRs as worldwide, gold-backed, currency but they don't have enough gold to make it work.  They approach GLD's trustee (BNY Mellon) or maybe even the custodian (HSBC) and offer them 2x SDRs for the gold.  Presto, change-o holders of GLD now have fractional ownership of gold-backed SDRs.  Of course, the SDRs would be worth more than the gold at the point of the swap, but your shares of GLD would suddenly turn into paper (well, they're paper already, but ...).

Is this likely? 

I don't know.  I certainly hope not, but I think it's plausible.  The players involved (IMF, BNY, HSBC, ...) don't give a sh*t about YOU, so YOUR interests here are not their primary concern.

Let's contrast this with GTU.  GLD owns $28B of gold.  GTU owns $850M of gold.  If I'm the IMF and I want a significant pile of gold to back SDRs, I'm not looking at GTU, I'm looking at GLD.  Even if I want to go after the gold GTU owns, the only way I can get it is to deal with GTU's trustees - who are not one of the TBTF banks.  They're ethical bastards who have run bullion trusts for 50+ years.  Goddamn son of a bitch.  Let's take over GLD and let these GTU guys make a killing.  Of course, we'll create a windfall profit tax - but that will apply to anyone who owns physical gold as well.

This is a SHTF scenario.  In this scenario I think GTU wins.  There might be other SHTF scenarios where GLD wins, although given the players involved I think it's unlikely GLD wins in a scenario GTU loses unless GTU's trustees suddenly turn into vampire squids.  I think we already know for a fact that nearly all the folks involved with all the ETFs are vampire squids.

Let's turn this around.  Please explain why anyone wants GLD if no redemption option and it's run by vampire squids?
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Re: Please explain why anyone wants GTU if no redemption option??

Post by pugchief » Sat Apr 18, 2015 7:25 am

rickb,

I assume, then, that you are recommending to vote against the Polar takeover bid?
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Re: Please explain why anyone wants GTU if no redemption option??

Post by rickb » Sat Apr 18, 2015 11:46 am

pugchief wrote: rickb,

I assume, then, that you are recommending to vote against the Polar takeover bid?
Yes.  I'm not a big fan of vampire squids.
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