Physical Graffiti

Down by the seaside
See the boats go sailin'
Can the people hear
What the little fish are sayin'
--Led Zeppelin

When buying 'paper gold,' my vehicle of choice has been the SPDR Gold Trust ETF (GLD). Initiated in 2004 (has it been that long ago?), GLD has become a popular and convenient way to gain exposure to the gold bullion itself. The fund now holds more gold than all but a few central banks.

A nice feature of GLD is that it is backed by actual metal. ETFs for other commodities (e.g., crude, grains, softs, etc) invest in futures contracts rather than in the physical commodity itself. GLD buys bars; those interested can actually track the bars the fund owns. For those who doubt the ability of futures exchanges to deliver physical in a pinch, or those who do not possess minimum capital necessary to buy gold futures, then GLD is attractive.

GLD does possess some drawbacks, however. Although GLD is technically backed by physical metal, individual shareholders can not take delivery of bullion unless they are 'qualified' to do so (codeword meaning that you have to own multimillion dollar positions in GLD before delivery is permitted). Also, the fund's arcane ownership and leasing rules suggest that the value of the GLD fund may not actually be backed by physical gold in the straightforward manner often presumed.

One other drawback is that GLD charges a management fee which clips about half a percent from the fund's value annually. Might not seem like much, but someone who plans to 'buy and hold' GLD for 10 to 20 yrs will realize some significant slippage vis a vis the underlying gold price.

As such, it's been hard for me to hold onto GLD for uber long periods of time, preferring instead to 'trade around' GLD while focusing on actual physical gold for my long term holdings.

Recently, however, the Sprott Physical Gold Trust (PHYS) has popped up on my radar.

Initiated by well known (and I think very trustworthy) gold guy Eric Sprott, PHYS is a closed-end mutual fund trust that trades on the NYSE and in Canada. PHYS differs from GLD in that it invests in gold that is fully allocated, meaning that the fund will not engage in short term lend lease activities that might jeopardize the fund's net asset value. Another attractive feature is that the fund holds its gold at the Royal Canadian Mint--which has utility for people wishing to gain exposure to physical gold that is held outside the US. Finally, PHYS is redeemable in actual physical gold, although the ownership minimum for redemption priviledges currently is 400 oz (about a half million USD).

The biggest drawback to PHYS is that, because it is structured as a closed-end mutual fund, the share price often trades at a significant difference from the underlying net asset value. When the fund first started trading earlier this year, the prices traded at steep premiums to the underlying NAV. Recently, however, that premium has been declining and now stands at 2-3%.

Today I started a small position in PHYS. What finally pushed me over the edge was a comment by Fleck that he had bought some--for basically the reasons outlined above.

Nothing crazy as I want to get a better feel for how this thing behaves. And don't worry, I have a ways to go before that 400 oz redemption priviledge kicks in...

positions in GLD, PHYS