Articles on investing and capital management, with a quantitative focus.

#prp - Permanent Risk Parity (how I invest)

Note on MNT for gold exposure


My PRP model portfolio has 20% weight in gold bullion, which I show as MNT in the model portfolio. MNT is nice because it trades in CAD currency and has pretty good daily liquidity.

I actually hold several gold bullion funds myself (not just MNT) because I have some concerns about the reliability of these funds.

There are a few exchange traded products which track the price of gold. The Royal Canadian Mint runs one of these, called Canadian Gold Reserves exchange traded receipts (ETR) which trades as MNT on the Canadian stock exchange. These shares are not ETFs in the traditional sense. They are a somewhat unique creation (which makes me nervous), but they have accurately tracked the price of gold bullion since 2012.

There is also an iShares Gold Bullion ETF which tracks the price of gold; it does the same job. This trades as CGL.C on the Canadian stock exchange. It's smaller than the Mint's fund, and is structured differently.

Those are the alternatives that exist in CAD currency, and I hold both of them. There are more alternatives in the US. The two best established ones are IAU and GLD.

Gold-tracking ETFs are not perfect

None of these ETFs are perfect. Electronic shares which track gold are a pretty new thing and they have not been tested over very long periods. I am therefore a bit skeptical about the ability of these things to perfectly track gold.

The ETF structure, created 30 years ago in Canada, was originally made for baskets of stocks. The structure works very well with stocks, and is based on a share creation and redemption mechanism (facilitated by a market maker) which keeps the ETF price in line with the underlying stocks.

However, that mechanism does not work the same way with commodities like gold. People have found ways to make it work, but it's all a pretty new experiment and there are various ways it could go wrong.

I'm cautious

Because I don't fully trust these gold-tracking mechanisms, my own investments are diversified across several of them: MNT, CGL.C, and IAU.

This way, if one of them fails catastrophically, I will not lose everything.

Recent market turmoil

In the recent turmoil, all three funds mentioned above did a great job tracking the price of gold. At times, MNT deviated from the ideal price and had a very large bid/ask spread, which is a bit of a concern.

Still, I was satisfied with what I saw during the market turmoil. However we should keep in mind that gold did not crash during these recent events, so this really was not a stress-test of these instruments.

Jem Berkes