“Government Guaranteed Zero-Downside Gold?!” Outstanding Investments

By Travis Johnson, Stock Gumshoe, March 29, 2008

This one has been around for quite some time, but I thought many of my newer Gumshoe friends might have missed it. It’s a teaser for Agora’s Outstanding Investments newsletter — which is their cheapest one at $49 a year. But hey, even at $49 a year, why pay if you don’t want the newsletter? If you just want to know the gold investments they’re teasing us with, read on …

The “Government Guaranteed” gold investment — also called “zero downside gold” — is one of the five ways they’re recommending you invest in gold in their special report, “Bullion and Beyond: Five Stunning Ways to Get Richer on the Epic Metals Boom Ahead.” As far as I can tell, this is almost identical to the ad that they sent out about a year ago (and again and again throughout last year), and it looks like the teaser investments also remain the same.

But the one that really catches the attention of many of my readers is the “zero downside” — especially in this market environment. It can be frightening to buy gold at close to $1,000 an ounce if you vividly recall it trading at a few hundred dollars just a few years ago … or if you recall the collapse from $850 an ounce during the last wild bull run for gold a couple decades ago. So “zero downside” certainly sounds appealing.

How do they describe it?

“This new U.S. government-backed guarantee
lets you own gold with no risk… but with 100%
of the gains should gold prices take off.

Here’s the catch…

You must act on this by April 15 , 2008…
or you risk missing the official deadlineand
getting shut out of this forever…”

How can you resist that? Why on earth would anyone buy regular old gold if they could get this instead?

Well, that’s why the devil is in the details — and in the very misleading “100% of the gains” bit in that teaser.

You see, this “government guaranteed” gold investment is a Certificate of Deposit offered by Everbank. And the latest iteration does have a “funding date” of April 15, 2008 — though it has nothing to do with tax day, and they have consistently offered new versions of this product every few months. This latest one is a seven-year CD, all the previous ones have been five year CDs.

The principal is guaranteed, and it is insured just like any bank CD (up to $100,000). So that’s the good part.

What’s the bad part? The devil in the details?

Well, this is a seven-year CD, and you lose the guarantee on principal if you cash out early. So if you might need the money before 2015, this is definitely not the way to go. But that’s technically true of many CDs, so that’s not the big deal.

The big concern, at least compared with the way this investment is teased by Outstanding Investments, is that you are unlikely to get anywhere near the full 100% return in the spot price of gold over that time frame.

You see, this is not like a regular index fund. It does have the principal guarantee, so you can’t lose any money (unless you consider losing purchasing power due to inflation — you get the actual cash back, no guaranteed minimum yield).

But someone who didn’t read the fine print on the Everbank product term sheets might really misunderstand what their return will be like compared to the return on an investment in physical gold. Especially if they counted on the marketing language in the Outstanding Investments letter (I don’t know if this is still the case, but several times in the past when I’ve seen these products recommended it turned out that the newsletter publisher also had an affiliate relationship with Everbank, meaning they also get a kickback if and when their subscribers buy the CD. This is definitely not illegal and there’s not necessarily anything wrong with it if it’s not influencing their advisory decisions, especially since they disclose it to their subscribers, but it still might give a reasonable person pause).

You see, Everbank’s CD return on these “marketsafe” products is not based on the change in the price of gold from the funding date to the expiration date. It’s essentially based on the average price of gold between those two dates.

As you might imagine, those numbers can be very different, especially in a bull market for the commodity. A look at the back of the product sheet for this CD from Everbank will make this clear to you — in the raging bull market for gold from 1974 to 1981, for example, gold went from just over $100 an ounce to almost $600 an ounce. So if you had held gold for that time period, you would have had about a 450% return. If you had held the MarketSafe CD for that time period (it didn’t exist then, this is a hypothetical), your return would have been 145%.

There is a positive flip side in declining gold markets or if you happen to catch a seven year period where the price spikes up and then declines — so for most of the seven-year periods between 1978 and 1997, the CD would have outperformed the spot price of gold. That’s mostly because the CD couldn’t lose money, since the return on gold for most of those seven year periods was negative. For the last ten years, the CD dramatically underperformed the market as gold moved from under $300 to over $800 an ounce.

They calculate the return by choosing 14 dates during those seven years, averaging the spot price of gold on those 14 dates, and giving you the difference between the price of gold on the “Initial Value Date”, which is six months from the funding date, and the average of all the Pricing Dates (including that initial date). So one real key to this is the “initial value date”, but you have no idea what the price of gold will be on that date until six months after you’ve already committed your money. And it can be quite confusing — if gold shoots up to $2,000 and then back down to $500 over the next seven years, it’s going to be a trick of fate, depending on what the price is on those specific 14 days, what your return will be, if any.

The MarketSafe CD isn’t bad or evil, of course, it’s just a financial product with specific terms that share the risk between the CD holder and the bank in a way that they believe will make it profitable to them. It might work out in your favor, and it’s probably a good match for the needs of some people, but it’s definitely not a simple CD that gives you a principal guarantee and 100% of the return on gold over the next seven years — and folks who are used to traditional bank CDs might make some assumptions about this one without reading the details, which could lead to some frustration or disappointment. You can read the factsheet here (and no, I do not have any kind of affiliate relationship with EverBank). They also do the same thing, with similar rules and requirements, for Silver, for Japanese REITs, and a few other esoteric investments.

Oh, and the only investment in actual gold that’s really guaranteed, as far as I know? That’s the gold coined by the US Mint, and they only guarantee that it contains the amount of gold they say it does, not that it will be worth anything in the future. I assume most other national mints make this same guarantee, which is why there’s an active secondary market in bullion coins like American Eagles, South African Krugerrands, or Canadian Maple Leafs. Guaranteed to be gold, but no guarantee that gold becomes more valuable.

What are the other gold investments that they’ve been touting in this email? I don’t know that I’ve looked at all of them before, but the “Gold for a penny an ounce” one is almost certainly Yamana (AUY), which we looked at from another advisor’s ad recently.

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The Gold ETF that they call “the safest way to own gold” is almost certainly just what you think it is, GLD, the ETF that represents physical gold that’s held in a vault for you (not an ETF of gold miners, which is also available).

And the “one gold stock to buy if you’re only buying one”, the company that is “ten steps ahead of every other gold producer” is, I’m fairly certain, Agnico-Eagle Mining (AEM) — the details are limited, but the general idea of the company is a match and it does have the identical teased 18 cent annual dividend. I looked at this one earlier, when it was recommended by Robert Hsu for his Asia Edge subscribers.

So more gold stuff for my the fantabulous Gumshoe readers on a lovely weekend. Enjoy, and let us know what you think about any of these investments, or any other grand ideas you’ve got about gold.

full disclosure: I do not own any investment mentioned here and will not trade in any of them for at least three days. I do own a small amount of physical gold and shares in another gold miner, Centamin Egypt.