Jesse: Gold Trust Premium Arb vs GLD

[WildspitzE]

Jesse has a really interesting discussion re: Gold Trusts, their Premiums, and a potential arb.

I've been wondering why the premiums on the trusts haven't been increasing as Gold tears it up. A thought I should have pursued more, now that I revisit it. I'm glad that Jesse did!

Interesting stuff...

http://jessescrossroadscafe.blogspot...ecious_30.html

"I am finding this contraction in the premiums of the gold trusts to be extremely interesting. Both followed an expansion of the fund's units and large sales of overallocations to the underwriters, providing liquidity not only to expand the trust but also to game the shares.

This expansion facilitates an arbitrage on the premium in which one sells the trust and buys GLD for example. And the holding of units by the underwriters assures a ready supply of shares for shorting, if one assumes that the big punters even bother with the nicety of borrowing shares."

[jk]

Re: Jesse: Gold Trust Premium Arb vs GLD

the premia are supported by the preferred tax treatment of the closed end funds over the pure commodity etf's. if the capital gains tax preference disappears next year, so will this support for the premia.

[WildspitzE]

Re: Jesse: Gold Trust Premium Arb vs GLD

the premia are supported by the preferred tax treatment of the closed end funds over the pure commodity etf's. if the capital gains tax preference disappears next year, so will this support for the premia.

My understanding is that the preferred tax treatment is applicable only to dividends.

How does this apply to gold closed end trust ETFs?

Isn't the premium for these largely dependend on the fact that it's physical gold in a vault (hopefully audited) vs. paper gold (a la GLD)?

[jk]

Re: Jesse: Gold Trust Premium Arb vs GLD

My understanding is that the preferred tax treatment is applicable only to dividends.

How does this apply to gold closed end trust ETFs?

Isn't the premium for these largely dependend on the fact that it's physical gold in a vault (hopefully audited) vs. paper gold (a la GLD)?

that too, but cef and gtu are considered closed end mutual funds, and eligible for capital gains treatment. gld and slv are considered commodity substitutes and taxed as collectibles.

[WildspitzE]

Re: Jesse: Gold Trust Premium Arb vs GLD

right! had forgotten that gld and slv are taxes as collectibles. duh!

thanks for setting me straight.

now that i think about it some more, i lean towards your suspicion re: cause for a compressed premium. occam's razor and all that.

[bk289]

Re: Jesse: Gold Trust Premium Arb vs GLD

Anyone have an opinion on long GTU or PHYS vs GLD in a margin account as purely an end of the world long-term insurance policy? I know that GLD management fees are ~50bp lower than the physically backed closed end funds so it's effectively a negative carry trade. Any other pitfalls?

Bob