Gold ETF and equivalency tracking.

One of the factors that affects how appropriate an ETF is to replace an underlying index is how well it tracks relative to the underlying index moves. Right now I am in a gold trade that I am using IAU as a proxy for gold futures contracts.

I have both the futures and the ETF prices tracking from my entry point as if I had bought both. So far my real position in IAU is beating the futures by a slim margin.

For example, last night's close for gold was 1362.7 and IAU was at $13.32. Now futures trade after hours so there is no continuous price changes to compare so EOD is as of 1600h yesterday. The increase from the position opening is 0.87% for gold (11.7 points) and 0.98% for IAU (13 cents per share).

While this is worth noting the real difference is mostly negligible as futures contracts can vary based on factors other than just the traded price for gold. If the contracts are skewed high due to demand or expectations then later on the futures increase in value may be less than the corresponding ETF as this initial disparity shrinks.

Basically, if the tracking is this close I consider it acceptable to base the gold trades off of the futures contracts for triggers at entry and exit. The only exception might be that virtually closing the futures trade due to proximity to the expiration date may not apply to the ETF trade. It depends on the trend.

Jeff.