Some investors might not be aware that SPDR Gold Trust (GLD) does not, in ordinary circumstances, allow for the redemption of physical gold while the Sprott Physical Gold Trust (NYSEARCA:PHYS) has the unique property of allowing investors to trade in their shares for physical gold deliveries. [This article takes a look at the performance, liquidity and purpose of each to determine which is best under which circumstances.]
Let’s start with their performance against each other:
Clearly, these two stocks follow the same path. But recently, we have seen PHYS outperform GLD on upward movements. Interestingly, this does not apply to downward movements.
The aggregate of this phenomenon has led to PHYS outperforming GLD by 2% YTD. One possible reason for this is that much of gold investing is fueled by fear. Part of that fear is that of the collapse of fiat currency.
Should fiat currency collapse, GLD shares would be meaningless, as they can only be traded for fiat currency. Holding PHYS during a fiat currency collapse is safer than holding GLD.
Of course, we are talking about an extreme black swan event here. In normal market crashes, fiat currency is still reliable (and deflation might actually make investors wait before exchanging cash for gold). Still, “investing is anticipating the anticipation of others”: if we know that many investors fear fiat currency collapsing and therefore take money from GLD, placing it into PHYS, we should do the same, as such a phenomenon will raise the price of PHYS relative to that of GLD.
Still, GLD has a clear advantage: liquidity. This liquidity offers many advantages:
- Lower risk of slippage.
- More precise actualization of exit and entry points during times of panic or gold sell-offs.
- Options strategies.
… with options strategies perhaps being the biggest benefit here. Anyone buying GLD is outright speculating on the future price of gold and might as well use options instead of buying a dividend-less ETF. With GLD, you can profit from the volatility of gold and even profit if gold trends sideways; with PHYS, you do not realistically have such a choice.
GLD was set up not as a way to invest in physical gold, but as an ETF that tracks the price of gold. Much like when you buy the SPDR S&P 500 ETF (NYSEARCA:SPY) you are not planning on outright buying all 500 stocks in the S&P 500, when you buy GLD your goal should be profiting from future increases in gold price. Contrast this with PHYS, which was set up as a convenience for investors who truly want to buy physical gold. By holding PHYS, you actually own gold without having to store or deliver it.
Because of the difference in their setups, taxation is different for these ETFs. Oddly enough, the tax benefits go to the owner of PHYS, not GLD. This is ironic, as you will see that buying an ETF with no right to own gold gets you taxed at the gold rate, while buying one with real gold gets you taxed at the stock rate.
When investing in GLD, you have a direct interest in gold, and therefore, are investing in what the government considers a “collectable.” Collectables are taxed at 28%. Thus, selling GLD after a profitable investment yields you 72% of the profit written on paper.
When investing in PHYS, you are technically investing in a company. Thus, selling PHYS after a profitable trade yields a profit of
- (Profit – Tax rate) for short-term trades
- (Profit – Capital Gains tax rate) for long-term trades
On average, this difference will show that PHYS will spare around 13% of your profits that are otherwise eaten up by GLD. Add this to the slightly better gains that PHYS gets, and you’re looking at a 15% loss when playing GLD versus PHYS. This fact alone could send investors from GLD to PHYS.
GLD’s gold is treated as a “collectible,” and gains on holding GLD, even for a time frame longer than a year, are taxable at 28%. Gains from PHYS holdings are treated as gains in shares in a company: if you hold PHYS for longer than a year, then the gains are taxed at the capital gains rate of 15% or 20%, depending on your income.
Play GLD when…
- You want to play options on the price of gold.
- You are worried about liquidity.
- You only care about tracking the price of gold.
Play PHYS when…
- You want the option of owning physical gold.
- You want slightly better gains on gold price spikes.
- You want to pay less in taxes upon realizing a gain.
- You believe the sky is falling.