We haven’t heard much from Greg McCoach in the last few months — not a big surprise, perhaps, since the middle of this year saw the decline of pretty much every single mining stock and hard commodity, and those are the things he covers in his Mining Speculator newsletter.
But now, he’s got a little wedge to drive in to at least get your attention. It’s hard to fire up the greed for iron ore, or copper, or little startup mining companies right now … but he can at least get your attention when he promises a new way to profit from gold.
Perhaps it’s an indication of how hard it is to get subscribers for a mining stock newsletter now, but he’s also apparently cut the price of his relatively inexpensive Mining Speculator newsletter (doesn’t seem like he’s pushing his $2,000 newsletter, the “Insider Alert” much at all these days).
We needn’t feel sorry for him, however, since with this ad he’s trying to sell something that one can fairly easily learn about for free. Let the learning commence!
Here’s some of the sell copy from this latest ad, which I started receiving on Friday:
“Despite a drop in prices, the gold bull market is about to get stronger.
“The fundamentals supporting today’s gold bull market have intensified exponentially over the past several years. And now the powder keg is getting ready to blow.
“When it does, investors who own gold, gold stocks, and other gold-related investment vehicles will reap handsome rewards.
“Sure, some rewards will be larger than others. Gold stocks, for example, typically yield a higher return than physical gold. However, there’s also a significantly higher degree of risk associated with gold stocks compared to physical gold, which has proven to be a safe investment for thousands of years.
“Fortunately, a New Investment Vehicle Is Now Available in the Market…Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
“…One that allows investors to retain the historic safety of gold and yield double the monthly profit.”
Now, to be clear, he doesn’t mean the “fundamentals” the way that most investors think of them — use of gold isn’t necessarily going up for jewelry, or electronics, it’s just that the price of gold usually goes up when the US experiences inflation — and that demand for gold tends to move inversely with sentiment about the stability of the world. Of course, we’re in the midst of a deflationary spiral that we’re desperately trying to break right now, but yes, most of the experts I read do certainly expect that, eventually, the massive attempts by the federal government to increase the money supply will bear fruit, and that increased money supply will lead to inflation down the road (all else being equal).
It’s an odd time, however — we’re going from a time of relatively high inflation caused by commodity demand, through a time of commodity deflation, and possibly into a time of monetary inflation caused by any increased supply of money — but that money supply can only increase meaningfully if banks lend money, and at this point it seems like they’re all still hoarding cash. It will take a wiser man than I to tell you for sure what’s going to happen … and I’m not even sure about what has happened this past year, let alone what will happen in the years to come, but perhaps it’s not unreasonable to go with the consensus: We have asset deflation now, we will have monetary inflation in the future.
Does that mean gold will go up? Beats the heck out of me. Gold is a rather unique commodity, in that it has very little practical use and acts sort of as the earth’s fiat currency — it’s just that it’s not a government that issues that fiat, but the global memory of crises past and the impact of that memory on the psychology of individuals and investors. For whatever reason, it has been decreed by human civilization that there is enough gold that it can serve as a medium of exchange when all else fails, but not so much of it that there won’t be enough to create a market. Plus, it’s shiny and pretty.
But you can’t eat it, or burn it, and if it has value after the apocalypse it will only be because those with the resources to build a rocket to another world might need it for the heat shields on their spacesuits, so perhaps if you have a lock on the supply they’ll promise to take you with them.
That’s beside the point, of course — no one is investing with an eye to the apocalypse, we’ll settle for worrying about a recession or, perhaps, a depression. And gold in the future will be worth whatever someone else wants to pay you for it — if there is heavy inflation the odds are fairly good that it will be worth more than if there’s deflation. Gold is also often considered an indicator of future inflation out six months or a year, but if that’s true it might be that inflation has already peaked and will continue to go down from here, since Gold reached its peak back in the early part of this year.
I’m no economist, nor am I an expert on gold or the history of gold price movements — I’ve read enough to believe that gold tends to maintain something like a steady purchasing power over decades of change, but also that the gold market is like many other markets — subject to numerous influences, and nearly impossible to predict with any accuracy over any particular time period.
But I do own a little bit of physical gold, and have dabbled with investments in gold miners in the past, and I generally believe that gold is a reasonable hedge against uncertainty. Gold probably won’t go down when all your stocks are going down, and it probably won’t go up when all your stocks are going up. Probably. So the folks who recommend keeping anywhere from 5-10% of your portfolio in gold might have something, and it’s hard to argue with them.
Where was I before I started this bit of general gold blather? Oh, yes, McCoach is promising that he has an investment that will go up at twice the rate of the price of gold. And he believes that we’re at a point similar to the 1970s, when gold was preparing for a parabolic move upward, so if you can double that return you’d obviously be a very happy camper, indeed.
So … what is it?
Just let me throw on the Thinkolator, tighten the screws a little … and voila!
This is the Powershares DB Gold Double Long Exchange Traded Note (DGP)
This is a note — that is, a debt instrument — that is designed to double the return of an index of gold futures contracts.
Or, in the words of the sponsor:
“All of the PowerShares DB Gold ETNs are based on a total return version of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold™ (the “Index”) which is designed to reflect the performance of certain gold futures contracts plus the returns from investing in 3 month United States Treasury Bills.”
So essentially, Deutsche Bank has an index that they’ve developed and that they track, based on keeping a steady exposure to the monthly change in gold prices as measured by futures contracts (plus the treasury notes that they hold), and they promise that this ETN will be worth whatever that index says. Because this is an ETN and not an ETF or a fund, there aren’t necessarily any underlying holdings that ETN holders have any right to, you just have the promise of the sponsor that your returns will match the returns of the index.
It has worked pretty well for the brief history of this ETN — if you look at the six month chart for DGP versus the physical gold ETF GLD (which is backed by actual gold in a vault), you’ll see that DGP has indeed returned about twice as much as GLD … that is, while GLD is down about 15%, DGP is down about 35% at the moment. Since GLD pretty fairly represents the actual movement of gold bullion prices to the moment, and DGP only tries to replicate monthly returns of futures contracts (with a bit of a treasury yield in the background), it certainly doesn’t work all the time, or with daily exactitude, and with big moves in gold the relationship can get quickly out of wack for any given period of time — when the world was falling apart at the end of September and the beginning of October, for example, there were some big swings when GLD and DGP pretty much moved in tandem for brief periods, with no doubling effect.
But yes, Virginia, you can leverage gold with an exchange traded investment on either the upside or the downside, just as you can with many other sectors. If you think gold is going down, by the way, the double short gold ETN is DZZ … or if you don’t want to be a kamikaze, the “single short” ETN is DGZ.
Of course, this isn’t the only way to use leverage — if you’re willing to pay a little more attention, you could always just buy GLD and leverage that bet with a small position in call options on GLD (you can’t buy options on DGP, just to answer that question before it pops up). Or you could just buy shares of GLD on margin, or take out a home equity loan to buy some gold coins at a ridiculous premium on eBay. Please don’t, but you could.
There has been some concern about ETNs in the current market, a concern that you wouldn’t have heard much about probably even a year ago: They do require you to take on some credit risk. Unlike a fund, which is just managed by someone but holds underlying assets that are legally owned by the fund holders, an ETN is a debt security that is an obligation of the sponsoring company, and if the sponsor goes bankrupt you’ve got to get in line with other creditors. I wouldn’t be that worried about Deutsche Bank myself, but there have been two recent examples of this in the recent past — Bear Stearns and Lehman Brothers both sponsored ETNs, Bear’s Bearlinx ETNs (there might have just been one of them, I haven’t looked it up) appear to just have been moved over with the purchase of the whole firm by JP Morgan, with little or no change, but the Opta ETNs from Lehman Brothers don’t appear to be trading anymore, and I suspect that if anyone held those notes up until the bankruptcy announcement, they’re just hanging around waiting to see what happens in Bankruptcy court (ETNs have a redemption clause for institutional investors, so it’s a reasonable guess that any big holders cleared out as the problems at Lehman settled in).
And I don’t want to pile in Greg McCoach, since he has the misfortune of specializing in a sector that is generally getting clobbered at the moment, and last year he did pick a number of really big winners (if you sold them), but it’s also quite possible for any investment advisor, himself included, to be right about the cause, and wrong about the effect, especially over the short term. Even when it all sounds logical.
The last time he was really active in advertising his services, at least that I saw, was back in February when he was warning that the financial system would collapse, and that bank failures would line up across the country and threaten to bring down the FDIC. He was right about that to a great degree (more right than I was, certainly), but he was wrong about what it would mean for the investment he was teasing — he told us that the collapse of banks would mean that silver prices would shoot up, and that the owners of a promising silver mine would reap the rewards. Bank failures have certainly picked up, and clearly we’re all concerned that we’ll see more of them, but the silver miner he touted, a little company called Canadian Zinc Corp., is down by something like 60% (from 90 cents or so to 24 cents today), and silver itself has fallen by about 30% in that same time.
That’s not to say his assertion is wrong — he says that we’ll see a typical pattern of currency deflation, followed by investment demand for gold (which is where we says we are now), that is followed by a gold mania that shoots prices up to the sky. It makes sense, it’s logical, but that doesn’t mean it’s absolutely going to happen — or that if it does happen, he’ll be able to tell you when it begins and ends. This is true of every advisor and every theory, of course, just throwing it out as an extra warning, since people tend to make magical assumptions about gold during crazy markets.
So … do you want to buy gold? Buy leveraged gold? Do something even sexier? When the consensus of pundits is this strong that inflation will skyrocket in the future, and that gold will go up parabolically as a consequence, and people are climbing all over themselves trying to overpay for gold coins, I get a bit nervous … but that doesn’t mean they’re wrong, or that you can’t profit from any possible “mania” to come in the gold market.