All-in-one gold fund addresses sector complexity

The MER for the series A of the fund is 2.30% plus GST. The F-class MER is 1.30%. “Unlike the close-end bullion funds where they do an initial public offering, and the [underwriting] broker fees are 7.5% &#151 which you need to earn in Canadian dollars just to break even, this fund starts investors at […]

By Mark Noble | August 24, 2009 | Last updated on August 24, 2009

5 min read

The MER for the series A of the fund is 2.30% plus GST. The F-class MER is 1.30%.

“Unlike the close-end bullion funds where they do an initial public offering, and the [underwriting] broker fees are 7.5% &#151 which you need to earn in Canadian dollars just to break even, this fund starts investors at par [minus the MER] ,” Cohen says. “It’s going to be a class fund, so they can rotate it into the other Dynamic Class funds without a tax implication. Investors can move in and out of the asset class.”

(05/24/09)

Mark Noble

The fund will also be currency hedged on a rolling 45-day cycle, which addresses another problem with gold investing — it’s generally purchased with U.S. dollars. Bullion’s value as a currency hedge can be undermined by fluctuations between the loonie and the U.S dollar.

The MER for the series A of the fund is 2.30% plus GST. The F-class MER is 1.30%.

(05/24/09)

Cohen expects to start the fund at a 50/50 asset mix. Then he’ll tactically rebalance the fund based on changes in the standard deviation of bullion or equities. He never expects to go less than 20% bullion in the fund.

The MER for the series A of the fund is 2.30% plus GST. The F-class MER is 1.30%.

(05/24/09)

There is increased demand for gold exposure. How and where to get that exposure is a difficult question: do you buy equities or bullion? Are you investing as an inflation hedge or for valuation growth? A new fund from Dynamic Mutual Funds attempts to offer a one-stop solution for all these issues.

Dynamic Funds has launched the Dynamic Strategic Gold Class. The fund, managed by Goodman & Company, Investment Counsel, seeks to achieve long-term capital appreciation by investing primarily in a strategic mix of gold bullion and equity securities of issuers engaged in the exploration, development or production of gold.

Most gold options either focus heavily on equities or invest directly in bullion. There are strong philosophical debates among investment managers on which approach is a more efficient way to get gold exposure. According to Robert Cohen, the new fund’s portfolio manager and vice-president with Dynamic Funds, an actively managed blend of equities and bullion will likely capture the greatest returns from the sector.

There has been intense interest in bullion investing, with a number of industry product launches in the last year that offer pure bullion exposure. The majority of gold equity performance is derived from gold prices, but equitieis can deviate substantially in performance from the price of gold for a number of reasons. Gold stocks can be significantly undervalued versus the price of gold.

“The primary benchmark of our Strategic Gold Class fund is gold bullion itself,” Cohen says. “The fund will enhance the returns by the strategic implementation of mixing stocks in with the bullion and leaning the fund into higher bullion weighting versus stock weightings and vice versa depending on how we see the changes in the standard deviation of gold stocks versus gold bullion itself. Therefore the fund will combine strategic and tactical allocations of gold bullion and gold equities to outperform bullion.

Cohen will use a proprietary model developed by Martin Murenbeeld, the chief economist of DundeeWealth and a publisher of the Gold Monitor, which suggests a tactical asset mix between bullion and gold equities based on changes in standard deviation. Murenbeeld has 30 years of research and consulting experience in gold and precious metals, currency, foreign exchange and credit markets.

Based on market conditions then, Cohen will shift the asset mix of the fund in an attempt to outperform the price of bullion by increasing the weighting of equities in the fund. Cohen, who is also the manager of the Dynamic Precious Metals funds, will use his stock-picking experience to find undervalued gold stocks — most of which will be mid-cap producers.

“We’re probably going to work within the guidelines of 25% to 75% weighting in bullion. Depending on what our model shows us, if we are more than one standard deviation of the normal trading pattern, we will skew the fund more toward stocks or more toward bullion,” he says. “In an extreme scenario, where we are totally against gold, we could go up to 30% cash, [which has a negative correlation to bullion].”

Cohen is bullish for the prospects of both equities and bullion. At the very least, he believes investors in the fund will outperform a lot of other asset classes. And he’s confident that the use of both asset classes will allow him to outperform other gold strategies in the market limited to one portion of the sector.

Equity leverage

Cohen says the majority of bullion performance is derived from fluctuations in the world’s money supply. First and foremost, bullion is viewed as a store of value against paper money. During the downturn, it kept its value as a safe refuge. Its value grows during periods of high monetary supply. Cohen believes the price of gold will continue to rise by as much as $100 an ounce in correlation to a growth of the global paper money supply. He says between 60% and 70% of the price of gold is correlated to monetary supply fluctuations.

“At our firm, we are not ‘inflationists’ — we don’t see what is measured within the consumer price index [CPI] increasing dramatically; supply has lots of excess capacity,” he says. “What does drive the gold price is an amazing correlation to money supply. Inflation is a second derivative of that. If you look at the global money supply — which is very skewed toward the U.S. dollar money supply — and you aggregate the entire global M2 U.S. money supply reserves and [the] change in that, you get a really nice correlation with the change in the gold price. The gold price is likely going to keep going up on the back of monetary reflation. Whether that is tied to the CPI is really a different question.”

Increases in physical supply are not outpacing demand. While lots of gold scrapping programs have come online and jewellery purchases have dropped with the recession, gold prices continue to go up, Cohen says.

“Investment demand crowds out jewellery demand,” he says. “Gold scrap supply has massively come out with no major impact on the gold price. A lot of people feel there are walls of excess supply out there. Meanwhile, when these extra tonnes are added to the global gold supply, they are easily absorbed by the market. Gold supply from mines is about 2,500 tonnes a year, falling at the margin, and you have another 1,400 tonnes of supply from above-ground stocks moving around.”

Equities build leverage on top of the gold price, because costs remain relatively fixed for extraction. In an environment of rapidly rising gold prices, gold producers can see their price-to-earnings multiples grow at an even higher rate.

“If a company’s cash cost is $400 dollars an ounce — your sustaining capital and amortization of your capital — you’re probably looking at $500 to $600 an ounce. If you add on another $100 an ounce to the price of gold, that’s pure profit — barring no changes in oil prices, steel prices and labour costs. As a percentage of profit at current gold prices, it’s at a three-to-one leverage [factor],” Cohen says. “We have stocks in our [precious metals fund] that are uncovering 10 million ounce deposits. That’s pure value creation, regardless of where the gold price is. That’s the beauty of gold stocks: companies are creating additional alpha and have a higher beta correlation to the gold price.”

The MER for the series A of the fund is 2.30% plus GST. The F-class MER is 1.30%.

(05/24/09)

Equity leverage

The MER for the series A of the fund is 2.30% plus GST. The F-class MER is 1.30%.

(05/24/09)

Mark Noble

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