DailyWealth Trader… “recommended going long a special gold fund”

By Travis Johnson, Stock Gumshoe, January 15, 2015

A quickie for the gold enthusiasts to discuss today, since several folks have asked about this “special gold fund” in the last week.

And yes, it’s not a super-hard one… but it’s pretty timely, and I thought it might be worth batting it around a bit.

Here’s the snippet from Stansberry that I got from readers, I haven’t seen the actual email or ad from Stansberry on this one:

“Last week in DailyWealth Trader, Brian noted the extreme pessimism in gold stocks and their recent breakout. He recommended going long a special gold fund… It holds the 25 gold stocks that are most sensitive to changes in the gold price. It ranks them according to low debt levels and high revenue growth… And it weights those stocks based on its rankings.”

This is a new gold miners ETF that was launched by Sprott last year, Sprott Gold Miners ETF (SGDM), and it is indeed designed to focus much more on the “best” gold miners. Here’s what yours truly wrote about it back in October when I mentioned it as part of a general update for the Irregulars on some gold stocks of interest:

“For those interested in speculating on gold miners or gold equities as gold trundles along at these low prices (bottoming? I don’t like that term — it implies you know what’s going to happen in the future… but it has certainly been in a relatively tight range over the last year or so following the huge collapse in gold to the $1,200 neighborhood), I’d suggest that safer ways to play the macro trend are probably the ETFs if you don’t want to build a basket of royalty and high-quality mining stocks yourself. I particularly like the new ETF from Sprott, though it’s not really been tested yet.

“That ETF, the Sprott Gold Miners ETF (SGDM) essentially takes a basket of 25 of the large and midsize gold stocks who have historically been most influenced by gold prices (higher “beta” to gold prices), then weighting those 25 to put more into the stocks with better balance sheets and better revenue growth. This ‘active indexing’ is rebalanced quarterly, and it makes sense to me as a way to weight the better-performing and safer stocks that will react well if and when gold goes up… and yes, Franco-Nevada is the largest holding at more than 15% of the portfolio. And though it is an “active” ETF, it carries essentially the same expense ratio as the dominant gold mining index, the Market Vectors Gold Miners ETF (GDX).”

During those three months, SGDM and GDX have tracked pretty much identically with each other and are up about 3-4%, with the price of gold (as represented by the GLD ETF) up a little less than 2%. Since SGDM was launched in July it is ahead of GDX by about one percentage point (down only 17% versus 18% for GDX), and both are down far more than GLD (which is about 3% lower than it was six months ago). If Dailywealth Trader recommended it last week they’re probably up between 5-10% on it right now, within a few split hairs of where GDX traders would be during the same time period.

So the jury’s certainly still out, but there is almost always substantial leverage in the gold miners when the price of gold moves — so both SGDM and GDX have rocketed up over the last month (SGDM up 28%, GDX up 25%) as gold as jumped up by 5% or so. One tiny bit of evidence that their “active indexing” to choose stocks with better historic leverage to gold prices has generated some excess returns in a good month, though you wouldn’t want to write that in stone for an index that’s been around for less than a year. They have rebalanced at least once since I wrote about it in October, so Franco-Nevada is no longer the largest holding — Randgold has edged them out by a hair.

This fund should continue to be more volatile than GDX, if only because their top three holdings (Randgold, Franco-Nevada, and Goldcorp) are about 45% of the fund. The top three for GDX (Goldcorp, Barrick and Newmont) are about 25% of that fund.

So, I’d probably still pick SGDM over GDX for gold mining exposure (I don’t own either at the moment) — but that’s slightly risky since it’s a new fund and it isn’t as diversified… and presumably, picking stocks that they expect to be more levered to gold prices means they will go down faster if gold falls sharply again (though both SGDM and GDX will stink if gold falls sharply, so that’s splitting hairs to some degree). The difference between the two has so far been slight, and the last six months indicates that it’s not likely to be worth too much time parsing the differences or worrying over which is better, but it is somewhat encouraging that SGDM has reacted well to gold’s good month. You can explore SGDM a bit on the Sprott website here if you’re curious. GDX is dramatically larger and trades with far more volume, but both have stuck to NAV as far as I’ve seen (no significant premium or discount).

Today’s move, the 5% jump in pretty much all of the gold miners, is mostly a reaction to the Swiss surprise that caused a bit of a safe-haven rush to gold in Europe and drove gold up about 3% — so whether it sticks or not is definitely an open question.

Think you’ll be best off with gold miners, with a particular gold mining ETF, or with physical ownership of the yellow stuff itself? Or perfectly happy to ignore the “barbarous relic” entirely? Let us know with a comment below.


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pat
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pat
January 15, 2015 1:28 pm

i can see people taking silver dimes for loaves of bread in hyperinfaltionary times, i cant really see giving up kruggerands for a tank of gas during that type of event though…

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Rusty Brown
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Rusty Brown
January 15, 2015 2:03 pm
Reply to  pat

Imagine what each of those King George VI Canadian silver dollars I got for top grades in school some years back will buy when the time comes!
I recall that my parents thought it extravagant at the time to spend a whole dollar for each of those miniature manhole covers. How little they knew.

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Roger Stevens
January 15, 2015 4:15 pm
Reply to  Rusty Brown

If someone had a precious metals etf that had a strategy of picking viable mining companies that would leverage higher as precious metals rise, it would be interesting. There must be companies that have large deposits of gold that are uneconomic to mine at present values and that should enjoy great leverage when prices rise.
In the meantime, I don’t need Sprott to find good streaming and royalty companies. If nothing else, I could just read the Gumshoe Detective.

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MRFAIRBETTER
Member
January 17, 2015 12:27 pm
Reply to  Roger Stevens

(SAND)
(ASM)

Patricia
Member
January 15, 2015 4:19 pm
Reply to  Rusty Brown

Good on you Rusty! Personally though, I don’t want to deal with the security problems of storing valuables at home. I like Sprott’s precious metal funds, all of them – the gold and silver ETFs are fully allocated, and I’d rather keep PMs in Canadian vaults than in any U.S. vault (I just trust the Canadians a bit more to not resort to repressive measures like seizure and hope they never prove me wrong!).

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Patricia
Member
January 15, 2015 3:57 pm

I tend to listen most to those who correctly predicted the U.S. financial crashes over the last 25 years (which are happening at closer intervals and increasing in intensity each time). I’ve long been convinced they are correct in saying that the basic cause of our economic volatility and instability is this now world-wide experiment of using only fiat currencies. Governments and central banks, naturally, favor currencies which are backed by nothing tangible, and so can be created without limit – and so can increase their spending and debt without limit. This system also forces countries to try to “win” against trading partners by devaluing their currencies against each other. Everyone loses in the long run.

Government and central banks’ “intervention” in the markets actually becomes just government control of markets. Look at how investors and traders hang on and react to every word uttered by a central banker, or even small government policy changes! Things were not always like this – and should not be like this now.

I’m not saying put all your money into gold, build a bunker, and hide there with stockpiled ammunition. I do believe in Buffet-style value investing. But it’s also important to listen to reasonable people, like James Rickards, who advises keeping at least 10% of your assets in precious metals. Then if/when a bad really crash occurs, and 90% of your paper assets fall, that 10% in gold and/or silver will rise enough to make up for it. He also warns though that government, if ever it returned to a gold standard, might then hit gold owners with a 90% “windfall tax”. Another thing to keep in mind is that in really bad times precious metals can go into a bubble of its own (skyrocket into a temporary high), so if they do then use that opportunity to purchase other real assets like real estate bargains (people in debt who are forced to sell off some real estate – even productive real estate – because they don’t have enough “money”, which you will…). Interestingly, after Germany’s hyperinflation episode of the early 1920’s, the first replacement currency was backed, indirectly, by land – then later they returned to gold. Both worked because the public had confidence in them. (Too bad it worked as well as it did actually, considering what Germany did soon after with their new industrial might…)

We really need to end up with a new global currency backed by tangibles. Money has got to have real, intrinsic value of its own in order for any exchange involving it to actually BE a fair exchange. The supply of money can’t be either limitless, as fiat currencies are now, or too restrained, like it was during the Great Depression (the Fed has been responsible for both extremes). Money supply simply needs to track with a healthy rate of economic expansion. We need to elect people who understand that.

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D
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D
January 15, 2015 4:56 pm
Reply to  Patricia

A better explanation would be hard to find.

testpack3
Member
January 15, 2015 5:39 pm
Reply to  Patricia

Good article Patricia. I think I’m about right in saying that the M2 money supply in USA and Europe is somewhere between 2-4% of its gold reserves. If Russia ( and maybe include China in an axis), was to start backing the Rouble ( Yuan) with gold reserves, this could be a ‘weapon of mass financial destruction’. Countries that have huge debts, and expensive welfare systems would quake at Au/currency relationship. Will it, can it happen, probably not in the foreseeable future. The Rouble is presently backed by oil price, and that leads to another completely different debate. Readers may be interested to know that the terrorist state which calls itself ISIS has recently minted it’s own currency. Gold 1 & 5 Dinars, Silver Dirhams and Copper Fils. It’s ironic that the most contemptible effluent on the Planet are ahead in this game. All in MHO of course.

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Patricia
Member
January 17, 2015 4:50 pm
Reply to  testpack3

You make some good points. Those countries have openly stated that the U.S. dollar should not remain the world’s reserve currency – but right now they can’t force a change without hurting their own economies badly. That’s not to say they won’t – despots like Putin act on crazy motivations all the time with no care for how much it hurts their people.

As for ISIS, as I understand it they are just unthinkingly instituting Sharia law in every way, including going back to gold and silver. Too bad about the association problem – it gives a false argument those who want to say gold and silver are archaic and outdated.

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