How Well Does GLD Track Gold?

Someone asked me:

How well does the GLD ETF track the physical price of Gold?

I used usagold.com as my source for the price of gold. I looked up monthly historic prices for GLD on Yahoo Finance.

Date	GLD Close	Gold	Gold/GLD
Dec 08	86.52	869.75	10.05
Nov 08	80.31	814.5	10.14
Oct 08	71.34	730.75	10.24
Sep 08	85.07	884.5	10.39
Aug 08	81.71	833	10.19
Jul 08	90.08	918	10.19
Jun 08	91.4	930.25	10.17
May 08	87.45	885.75	10.12
Apr 08	86.65	871	10.05
Mar 08	90.41	933.5	10.32
Feb 08	96.18	971.5	10.10
Jan 08	91.4	923.25	10.10
Dec 07	82.46	833.75	10.11

I looked up the monthly closing prices for GLD and gold for 2008.

Paradoxically, GLD gained 4.92% in 2008 but physical gold gained only 4.32%. That's a weird discrepancy. I would have expected physical gold to outperform GLD.

GLD charges a maintenance fee. GLD also lends out its physical gold for short sales, with the proceeds reinvested in the fund. GLD uses some leverage via futures. That might explain why GLD outperformed physical gold. I'd have to read the GLD annual report for full details.

I calculated the standard deviation of "Gold/GLD". I calculated a standard deviation of 0.098, or 0.966%.

I read that the gold market closes at 2:30pm, but the GLD ETF closes at 4pm. That could explain some of the observed discrepancy.

Therefore, my conclusion is "GLD tracks physical gold with a standard deviation error of 1%. Even though GLD charges a management fee, GLD may slightly outperform physical gold. GLD loans its gold out for short sales. GLD uses some leverage via futures."

The way that the GLD ETF is structured, the shareholders eat the loss if there's a default on the gold leases. Suppose that GLD leases 5% of its gold out for short sales, and there's a default. The fund shareholders, and not the ETF management, face the 5% loss.

If you sell the GLD ETF shares, your broker is required to report that transaction to the State. You are taxed at the 28% capital gains rate, instead of the 15% rate for stocks. If you have physical gold and know a buyer who will pay cash, then you can avoid capital gains taxes. Capital gains taxes on gold are immoral, because you are merely taxed on compensation for inflation.

Suppose there is SHTF scenario where the financial system completely collapses. In that case, GLD ETF shares will probably be worthless. If your goal is to preserve your savings after the collapse of the State, then physical delivery is the best option. Of course, if you take physical delivery of gold, "Where to store it?" is a problem.