Investors who are interested in owning a publicly traded instrument that holds gold often purchase the SPDR Gold Trust (GLD). In this article I discuss the benefits and risks of instead purchasing the Central GoldTrust (GTU), which is a Canadian closed-end fund that holds gold bullion. Ultimately the two funds satisfy the investment goals of two different kinds of gold investors, and I will discuss which investors should buy each fund at the end of this article.
Four Advantages of the Central GoldTrust
What follows are four reasons to choose the Central GoldTrust over the SPDR Gold Trust. In general these reasons imply that investors in the Central GoldTrust have a stronger legal claim to physical gold than holders of the SPDR Gold Trust.
1: SPDR Gold Trust shareholders have no voting rights except if 2/3 of the shareholders decide to remove the Trustee (The Bank of New York Mellon (BK)) (SPDR Gold Trust prospectus, p.4). Consequently SPDR Gold Trust shareholders lack the right to decide where the gold is held, how it is held, and who audits the fund.
Central GoldTrust shareholders have voting rights and can choose board members (2012 GTU annual report, p. 1, 2).
2: The SPDR Gold Trust’s gold may be held with subcustodians, which are chosen by the custodian (HSBC (HBC)). Subcustodians may employ additional subcustodians to hold the SPDR Gold Trust’s gold. The trustee has no say in this. If gold that is held by a subcustodian is lost SPDR Gold Trust shareholders have limited legal recourse (SPDR Gold Trust prospectus, p. 11). Basically, if (1) the custodian gives some of the SPDR Gold Trust’s gold to a subcustodian to hold, (2) this subcustodian loses or steals some or all of this gold, and (3) the custodian can prove in court that (1) was a reasonable action (i.e., HSBC had reason to believe in the competence and integrity of the subcustodian), then the custodian is not responsible for SPDR Gold Trust shareholders’ losses.
The Central GoldTrust has only a custodian (the Canadian Imperial Bank of Commerce). The custodian cannot release any of the Central GoldTrust’s gold without permission from the Board of Trustees (2012 Central GoldTrust annual report, p. 1)
3: The SPDR Gold Trust’s gold is allocated, but not segregated. That is to say, the gold can be identified by serial number (see the SPDR Gold Trust’s gold bar list) but it is not necessarily set aside in isolation by the custodian at a definitive location.
The Central GoldTrust’s gold is segregated, and there is a definitive statement as to its location (the underground treasury vaults of the Canadian Imperial Bank of Commerce) (2012 Central GoldTrust annual report, p. 1).
4: According to the SPDR Gold Trust prospectus: “The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the expenses of the Trust’s operations” (GLD prospectus, p.2, my italics). Imagine that there is a fund created that reflects the price performance of Exxon Mobil (XOM) that says that its goal is to reflect the price performance of Exxon Mobil shares. This does not imply that the fund actually holds Exxon Mobil shares, as it may hold call options or some other array of derivative contracts.
According to the Central GoldTrust’s 2012 annual report: “[The Central GoldTrust’s] purpose is to acquire, hold and secure gold bullion on behalf of its Unitholders” (p. 1, my italics). An implication of this stated goal is that the fund’s shares should closely reflect the price of gold bullion, although this is not necessarily the case (the SPDR Gold Trust prospectus also claims that its shares do not necessarily reflect the exact spot price of gold (p. 7)).
Advantages to Holding the SPDR Gold Trust
Despite the fact that the Central GoldTrust offers investors a stronger legal claim to physical gold than the SPDR Gold Trust, there are four primary risks to holding the former in lieu of the latter.
First, according to its annual report the Central GoldTrust holds 98.6% of its assets in gold, and some of this gold (albeit less than 1%) is held as gold certificates. The Central GoldTrust is only required to hold 90% of its assets in gold (p. 1). The SPDR Gold Trust is a “pure” gold play.
Second, the Central GoldTrust is not very liquid compared with the SPDR Gold Trust. The Central GoldTrust trades less than 100,000 shares daily, whereas the SPDR Gold Trust trades several million shares on a daily basis, and recently (since the drop in the price of gold on April 15, 2013), the SPDR Gold Trust has traded at least 15 million shares daily and it has traded as many as 93 million shares in one day. Higher liquidity generally entails that the bid/ask spread is smaller; it also implies that sellers who need to liquidate in an emergency for whatever reason will be better able to do so.
Third, there are no options that trade on the Central GoldTrust, and consequently it is a position that is not easily hedged. The SPDR Gold Trust has a very liquid option market. It is true that investors can hedge their shares in the Central GoldTrust by purchasing put options or selling call options on the SPDR Gold Trust, but as the next point reveals, this strategy is imperfect.
Fourth, the Central GoldTrust is a closed-end fund, whereas the SPDR Gold Trust is an ETF. As I mention above, the SPDR Gold Trust prospectus claims that one of the risks to holding the shares is that these shares may not trade in line with their net asset value. While this is the case history suggests that the SPDR Gold Trust trades in line with its shares’ NAV, whereas the Central GoldTrust shares often do not. On April 19, 2013 the Central GoldTrust traded at a 2% discount to its NAV. This particular situation may create an arbitrage opportunity whereby traders can short the SPDR Gold Trust and buy the Central GoldTrust. However, in general the Central GoldTrust trades at a premium to its NAV (which may very well reflect investor sentiment regarding the four points I make above), and buying the shares during these time periods can lead to investors underperforming the price of gold when they intended to gain exposure to the price of gold.
It is clear that the Central GoldTrust and the SPDR Gold Trust offer different ways for investors to own and trade gold. Generally, investors who are categorized by the following criteria should purchase the SPDR Gold Trust:
- Investors who take a shorter term time horizon
- Investors with a trading mentality
- Investors who wish to hedge their positions
- Investors who are less concerned with actual gold ownership and more concerned with exposure to the gold price
Investors who meet the following criteria should purchase the Central GoldTrust:
- Investors with a longer term time horizon
- Investors with a buy and hold mentality
- Investors who are more concerned with physical gold ownership and less concerned with exposure to the price of gold
- Investors who do not mind holding a small position in financial instruments priced in Canadian Dollars
- Investors who are skeptical of the integrity of banking institutions such as the Bank of New York Mellon or HSBC