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"Christmas is coming, the champagne's getting flat;
"Please put a penny in the old broker's hat..."
– David Phillips, The Chart Prophet
ONE
OF THE BIG stumbling blocks for investors thinking about gold is that it doesn't
offer to pay any income.
That's why bone-headed gold
schemes turn up like Simon Cowell at a botox clinic.
But just as better living
through chemistry can make you smile for a while, so "enhancing"
the Gold Market looks doomed to
leave your face sagging in the end. Gold Link Income Plus, a Sydney-based
fund manager that floated on the ASX in July 2005, raised some A$150 million
from investors (US$129m) since opening in 1998.
Now it's got barely one
dollar in seven to give back.
The 86% loss came after
"seven really good years and one bad year," as the founder, Richard
Kovacs, told The Australian in
early December. "That big loss has destroyed my business and my
credibility."
It has also left with A$20m
earned in nine years, apparently, and the multi-level marketing-type name
should have given it away – Gold Link Income Plus. But you might
struggle, as we do here at BullionVault, to see quite
how "gold" and "income" can ever sit together in the same
product. Not one that actually keeps working, that is.
"The age old problem
with bullion," as the Sydney
Morning Herald announced to its readers in Feb. 2006, "is that while
gold might be pretty to look at, it hasn't paid interest or dividends.
"No more. Gold Link's
Income Plus Fund trades like a share (code: GLI) and pays a fully franked
dividend four times a year – totaling 10
cents – by borrowing gold cheap from central banks and selling it in
the futures market and investing the proceeds."
Or rather, according to The Australian in its report at the
start of this month, "the company operated a trading strategy betting
that volatility, or fluctuations, in Gold Prices would remain
constant or increase."
Whichever route Gold Link
actually followed into gold options, as the Gold Market has soared
since mid-2005, it also took a series of breathers, knocking volatility lower
and destroying anyone betting that volatility would keep rising.
"The scheme wasn't
model driven [and] it wasn't human error," pleaded Richard Kovacs in
late November, just before the rest of the Board joined him and quit on the
eve of an angry shareholders' meeting.
"The fact is,"
Kovacs went on, "the global options market fell and fell from late 2006
into 2007 and that adversely affected the value of our portfolio." And
he was so close to getting it right!
Price volatility in the Gold Market has since shot
higher. "One-month volatility rose from a low of 10.8% in July to 17.4%
in November," notes Jessica Cross in the latest Yellow Book from Virtual Metals. "Day-for-day," agrees
Wolfgang Wrzesniok-Rossbach at Heraeus
– the German refinery group – "the inter-day movements in Gold Prices have been
larger than what used to be the complete trading range for a whole quarter."
"And within this
highly volatile market," he adds, "gold continues to hold on to its
generally upward trend."
Indeed, holding physical
bullion – and leaving it well alone – would have matched the 15%
yield squeezed out by Gold Link Income Plus pretty well over the last
half-decade, for US investors at least.
Gold hit new record highs
for Australian owners in November this year, just as it did British gold
buyers. Anyone trading in US Dollars, meantime, could have enjoyed an annual
"income" from gold – selling their gains each New Year's Eve,
and then using that yield to live off for the coming 12 months – of
17.6% gross on average since the start of 2003.
In a bull market this
strong, why meddle with options at all? Why not just Buy Gold and hold it?
Well, firstly of course,
only an idiot would put all of his money into a non-yielding asset – or
so your financial advisor would say. (Just ask him yourself; he could
probably do with a laugh this Christmas.)
Second, there was no
guarantee the price of gold would keep rising, but with Gold Link's system,
it "[was] not essential for the gold price to rise," as the Sydney Morning Herald noted at the
start of 2006. For the first couple of years, Gold Link managed to make
bankable cash out of flat and even falling gold prices.
Last, but not least,
running a complex gold-trading program pays management so much more when
you're doing something clever that your investors don't quite understand.
"Since it started six
years ago," the SMH added in
2006, Gold Link "has posted an annual pre-tax return of about 15% after
taking out the 1.75% management fee and a quarterly 15% performance fee."
Now you're talking! Fifteen
per cent of your clients' profits – plus a 1.75% annual yield from their
investment dollars – sure beats scraping by on 0.8% dealing commission
like we do at BullionVault. (Our
gold-dealing fees fall to 0.4% and then down to 0.02% for bigger, more active
traders.)
"It simply beggars
belief that Mr Kovacs has continued to claim these huge fees as manager
despite the huge losses," says David Woodiwiss
– one of 3,000 investors now expecting the return of just 20¢ on
the dollar, rather than a return of 15% per year – to The Australian in early December.
Richard Kovacs is reckoned
to have paid himself more than US$17m for running these funds into the
ground. But to be fair, he was worth every penny – as along as it
lasted – for squaring the circle of gold vs. income.
You see, financial service
firms the world over hit a big problem when they give in to demand and sell
gold to private investors. For the damned stuff flatly refutes everything
else your financial advisor will tell you.
First, gold doesn't pay you
an income. Indeed, it costs you to own it unless you buy
"unallocated" gold, swapping your storage fees for risking your
gold on somebody else's balance sheet.
The charges for owning gold
outright, on the other hand, can soon add up to 2% or more of your bullion's value
each year. That soon eats into your wealth faster than most actively-traded
mutual fund fees.
So capital appreciation
– in terms of your domestic currency – remains the gold buyer's
one hope. And this lack of income sets gold, like all base commodities, far
apart from the paper bonds and equity shares that pay brokers their fees and
set up commission trails for advisors.
Even if a stock holder
doesn't receive a dividend this year, at least he or she can expect
stock-price appreciation as the rest of the market bets on future returns
showing up soon after the board chooses to split profits with the company's
owners.
At least, that's what
Google stockholders must be telling themselves...up there at a price of 54
times earnings right now.
The net result of dividends
or capital growth, however, can sometimes prove hard to distinguish. It's a
cash gain either way, whether realized or not. And your financial advisor
will always advise that real, long-term wealth comes from rolling this year's
earned income back into your holdings.
Re-investing your dividends
like this will then sprinkle the magic of compound interest onto your wealth
– "the eighth wonder of the world," as Albert Einstein once
said. And who'd want to turn away Tinkerbell?
But once you've built up
your wealth, you can't eat re-invested income. Which is why retirees and
pension fund managers know only too well the financial industry's other great
standby:
Stocks are for growing your
money; bonds then pay out in retirement.
Like most received wisdom,
however, this is simply "a bad idea whose time has gone," as Linda
Stern writes for Reuters.com. The theory that "retirees should keep a
lot of their money safe in bonds" just doesn't stack up, she explains,
pointing to a study by Tom McGuigan at the Burns
Advisory Group in Connecticut.
He tested different portfolio mixes against typical retirement withdrawals,
testing them over a range of three-decade periods, and starting with a 5%
drawdown in the first year.
These imagined withdrawals
then grew by the rate of inflation each year...and McGuigan's
got bad news for anyone hoping to eat or keep warm at, say, 90 years of age
after retiring at 60:
Bonds just don't pay.
"The all-bond
portfolio was the big loser," says Stern. "It only lasted 30 full
years in three of the 26 periods tested. But the 60/40 mix wasn't that much
better. It succeeded less than half of the time, lasting 30 years in just 11
of the 26 periods tested."
Putting all of your money
into the S&P, even during the greatest bull market on record, would have
fed and clothed you with only a 69% success rate. "The only portfolio
that had a 100% success rate," the study found, "was a completely
diversified portfolio of stocks that included shares of large and small
companies and growth and value companies."
Looking ahead today,
however, pensioners and near-retirees – as well as pretty much everyone
else trying to grow their money in 2008 – have got to wonder: What
happens to that 100% strike-rate for broadly invested stock holders if growth
now gives out?
Nearly one-third of
retirees holding just S&P500 stocks would have come up short since the
end of the 1960s. The only sure route to surviving the full 30 years of McGuigan's study was to allot a portion of money to
small-cap and growth shares as well.
But cut out the '80 and
'90s boom in growth shares, and how many "completely diversified"
stockholders would have spent the last few years of their life eating from
trash cans instead of feasting at Tootsies?
Throw in the gnawing
inflation – and falling stock earnings – of '70s-style stagflation, and you might come to ask whether stocks now
offer anything near a livable income for retirees
today.
Trying to live off an
"income" paid by gold bullion, in contrast, is a crazy idea no
financial advisor would dream of. But at least the dead metal preserved
wealth throughout the Seventies. If inflation keeps rising on the fresh tide
of Fed rate cuts, gold might just beat stocks and bonds yet again in 2008.
By : Adrian Ash
Head of Research
Bullionvault.com
City correspondent
for The Daily Reckoning in London, Adrian Ash is head of
research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This
article is to inform your thinking, not lead it. Only you can decide the best
place for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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