Concerns About PHYS [Correction]

May 20, 2010


Premium (Discount) Frequency Distribution

Source: Sprott Asset Management

This hasn't stopped a flood of security-obsessed gold bugs from swarming the fund. PHYS, which launched in February, already trades over 1 million shares a day, and has $441 million in assets under management.

And there's the greatest irony: Gold bugs panicking over GLD's connection to physical gold instead have flocked to an closed-end fund whose value has significantly deviated from the actual price of gold.

It's OK to ask questions and, like we always say, every investor should do his or her due diligence before choosing an investment. But in the case of PHYS, investors who are purchasing at a premium are paying serious cash to avoid what seems to us like a better-constructed ETF, simply out of paranoia and fear.

All things considered, GLD's a pretty rock-solid fund. Its gold bars—all 1,200 or so tons of them—are kept in HSBC's
London vaults, and the holdings are audited multiple times every year by two different parties. Security measures for the vault resemble that for gold reserves kept by central banks. SSgA posts the full holdings of GLD up on its Web site every day, and the list of gold bars is updated every Friday. Frankly, if there were gold missing, or if GLD didn't hold the gold it claims to, we'd know by now.

Like I said, I like gold, and I think it can play an important role in your overall portfolio. But not all that glitters is worth your investment—especially if you're buying out of fear.

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