“Make $2 Every Time Gold Goes up a Buck ” McCoach

by Travis Johnson, Stock Gumshoe | November 4, 2008 7:42 am

We haven’t heard much from Greg McCoach[1] 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[2], or copper[3], 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[4].

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[5]” 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…

“…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)

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Mouthful, eh?

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[6] 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[7] 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[8] 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[9] 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[10] 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[11], 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.

Endnotes:
  1. Greg McCoach: https://www.stockgumshoe.com/tag/greg-mccoach/
  2. iron ore: https://www.stockgumshoe.com/tag/iron-ore/
  3. copper: https://www.stockgumshoe.com/tag/copper/
  4. gold: https://www.stockgumshoe.com/tag/gold/
  5. Insider Alert: https://www.stockgumshoe.com/tag/insider-alert/
  6. leverage: https://www.stockgumshoe.com/tag/leverage/
  7. options: https://www.stockgumshoe.com/tag/options/
  8. coins: https://www.stockgumshoe.com/tag/coins/
  9. Lehman Brothers: https://www.stockgumshoe.com/tag/lehman-brothers/
  10. silver: https://www.stockgumshoe.com/tag/silver/
  11. gold coins: https://www.stockgumshoe.com/tag/gold-coins/

Source URL: https://www.stockgumshoe.com/reviews/mining-speculator/make-2-every-time-gold-goes-up-a-buck-mccoach/


16 responses to ““Make $2 Every Time Gold Goes up a Buck ” McCoach”

  1. what about the gold bullion credit card? backed by bullion deposited at vaults in s africa by individuals, to guarantee credit worthiness,buy shares in creditcard co,making loads of profit as prices fly away.ron g.

  2. rebukeyou says:

    SOUTH AFRICA ???? YOU MUST BE KIDDING, IF NOT I HAVE A BRIDGE FOR SALE, NO REALY!

  3. Jim Ilchyshn says:

    Horizons also has an ETF that you can bet on the price of gold and other things at two times beta.
    You can bet on up or down (HGU or HGD) and the same with oil, nat gas, US$, grains, etc.
    – Jim.

  4. pete niestroy says:

    Check out http://www.goldmoney.com. I learned about the company from Schiff’s book SuperCrash. It is located in the Channel Islands. You can trade dollars or euros for gold and silver.

  5. Big Mo says:

    BTW my portfolio was up 5.4% overall in October, or 65% annualized. Not bad for the worst month in 21 years.
    Part of my daily education comes from this site, not only from Gumshoe, but from the wealth of knowledge from the readers/bloggers such as yourselves. Thank you Gumshoe for a great site and a daily dose of education and insight.

  6. Myron Martin says:

    Travis is correct that nobody can accurately predict the WHEN of a market move consistently and McCoach is not the only “goldbug” who has been anticipating a rise in precious metals prices. If there were a free market in gold and silver the price WOULD be up and I have no doubt that the breakout is near, but I am not about to predict the WHEN either!

    John Embry of Sprott Asset Management and Ted Butler on silver make the case that the price of precious metals is being manipulated by the bullion banks. The bankers realize only too well that allowing gold to rise above $1000. (or silver above $20.) will only reinforce peoples distrust of the fiat banking system that creates money out of thin air. In FACT, IF the masses at large UNDERSTOOD how the banking system really works the price for gold and silver would DOUBLE in a heartbeat and i WILL predict that sometime in the next year we WILL have a day in which gold rises by a $100. in one day!

    The bankers are rapidly running out of ammunition to continue their interventions in their desperation to get out from under their short sales and ultimately they will lose the battle as continued credit problems spread to additional sectors (credit cards, commercial real estate as examples) and the banking system becomes even more stressed through continued deleveraging.

    The market has not taken this extraordinary plunge because earnings and VALUES have plummeted, rather the breakdown of the financial system has triggered margin calls and panic selling, mutual fund redemptions, hedge fund collapses etc.without regard for the intrinsiv value represented by the shares of sound companies. For example, does anybody really believe that a 4% reduction in fuels usage should lead to a 50% reduction in the price of crude? Markets over the past 6 months have been totally irrational!

    The simple fact is, contrary to statements by Travis; quote: “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”
    AU contraire, talk about putting the cart before the horse, gold has many practical usages and is the ONLY medium of exchange that is not also somebody elses liability. The FACT is gold and silver have served as mediums of exchange and stores of VALUE long before our current fiat money system became established as a SUBSTITUTE for REAL MONEY, i.e. having intrinsic value!

    Dictionary definition of fiat money is; “money (as paper currency) that is not convertible into coins or specie of equivalent value and that is DEPENDANT for its VALUE on the DECREE of GOVERNMENT!”

    Travis also says; quote: “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.”

    How can inflation have peaked when the money supply (printing press money) is being CREATED at an exponential rate to bail out the systems current breakdown? Fiat money comes into existence as a debt instrument that requires the payment of interest (which is NOT created) diluting the value of every existing dollar?

    As for gold having peaked, NONSENSE! While it would be proper to say that gold reached its highest level so far this year back in the spring, the fact is that in inflation adjusted terms it would have to rise to $2100. just to match the $850. price in 1980.

    The real truth then is that the price of gold has not risen so much as the cost in paper dollars would indicate, RATHER, the VALUE or purchasing power of paper dollars has decreased making gold SEEM more expensive!People are brain washed into thinking a dollar is a dollar when in reality the purchasing power of todays dollar is about 5c in terms of a dollars purchasing power when we went off the gold standard in the 70,s, once again a cart before the horse situation. Gold by contrast has maintained its purchsing power over thousands of years as Travis acknowledges.

    INTEREST=inflation, as simple as that and the Federal Reserve Act of 1913 created a MONOPLY for private bankers who have in effect become legal counterfeiters, i.e. they print numbers on paper having no intrinsic value and call it “MONEY” that can only be acquired by going into debt and agreeing to pay interest until it is paid back, in effect it is the MOTHER of all PONZI schemes as an exponentially increasing number of loans must be made to replace the interest they are taking out of the system.

    I could provide much more detail but this is already longer than most people will read, but it is because people in general do not READ and STUDY and ask questions that this massive fraud that robs people of their purchasing power was ever able to be sold to the masses. Inflation is like the proverbial frog who cooks to death because the rising temperature of the water is so gradual it causes no alarm. Your earnings are being stolen by this effectively “hidden tax” that robs you of purchasing power!

  7. There is an inverse correlation between the US dollar on the one hand and the price of gold and crude oil on the other. So recently we have witnessed gold slipping back towards $700 as the US dollar strengthened.

    Gold will likely remain relatively weak as the world economy works out its deflationary cycle.

    It is likely, however, that over the longer term those investors buying precious metals such as gold and silver will be rewarded when the global economic growth turns up. We will see much higher inflation caused by the trillions of dollars pumped into the financial system to mitigate the worst effects of the credit crunch and to boost liquidity and kick start economic growth.

    Also I hear that now Goldman Sachs appears to be taking a net long position on gold.

  8. bebe rebozo says:

    Goldman is hardly the voice of the astute investor. $200 oil anyone? Here’s the deal on Gold. Deflation is not what makes the metals tick. Fear is. Therefore the stalemate. In my view the metals will tread water here for a year or two. While the very rich have the money to buy, inflation will be imagined but no where to be found.

  9. John Laegal says:

    I have a question: Does’nt inflation mean higher interest rates in the USA to control inflation? The US is not an emerging economy, therefore higher interest rates will attact investment in US currancy/equities/bonds etc. Is this not a balancing mechanizm to support the US Dollar.

  10. Benito says:

    The guru at a technical analysis site i subscribe to points out that a lot of pundits are comparing the current crisis to the great depression and at that time there was worldwide deflation. And if indeed it’s true that today’s is similar to the great depression, then only gold and treasuries were the only investment that went up.

  11. The gold doubler that I have is DGL. I bought the 33 Apr calls and the timing was fortuitous. I am not familiar with the DGP. Call options on doublers offer good prospects with minimum risk.
    Herach.

  12. David Hyers says:

    Travis,

    Have you seen Greg McCoach’s latest promo for INsider Alert, concerning Obama’s confiscation of everyone’s IRA and 401K very soon. IT also pushes a .30 Canadian GOld stock and a way to evade the government takeover similar to the gold conviscation here and Argentina’s government take over of citizen’s funds a few years back. Dave Hyers

  13. stan,fl says:

    Silver and Gold,when Long and when Short, appreciated, Thanks>>>>>>///////

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