King Midas in Reverse

By David Dittman • April 16, 2013 • Canadian Edge Weekly

The price of gold for June delivery bounced by USD26.30 per ounce, or 1.9 percent, to close at USD1,387.40 on Tuesday, April 16, on the Commodities Exchange (COMEX) of the New York Mercantile Exchange (NYMEX).

Gold briefly traded above USD1,400 before settling down in heavy trading following the worst two-day decline in 30 years Friday, April 12, and Monday, April 15. The yellow metal hit its lowest level in more than two years on Monday, as it declined by 9.3 percent to near a more than two-year low.

It’s now down 17.4 percent year to date in 2013, which would qualify as its biggest annual decline since 1997. Much of that decline happened during the last few days, as the Friday-Monday selloff was 13 percent, the biggest two-day slide since February 1983.

Since 2001 gold has gained 410 percent, versus an increase of 18 percent for the S&P 500 Index. Adjusted for inflation, the peak price for gold on the NYMEX COMEX of USD873, established in January 1980, is about USD2,413 per ounce, according to the Federal Reserve Bank of Minnesota.

That’s 25.4 percent higher than the record nominal price set in September 2011 and 73.9 percent above today’s price. The adherents who perpetually advocate for ownership of the yellow metal no doubt argue that recent weakness is a golden buying opportunity.

This idea is based on several rote concepts that underlie what’s commonly, perhaps derisively, referred to as “goldbuggery.” The primary tenet is that gold is currency, or a permanent store of value, and not a decorative metal used to make jewelry or an industrial metal used to manufacture electronic components.

Those who believe in gold’s splendor will point to the copious amounts of money-printing by the world’s central banks over the last several years and the potential for more “quantitative easing” ahead to justify predictions of USD2,000 and much, much higher.

Another aspect of this tendency is the argument that a return to the gold standard is inevitable, that hard money must be the answer to the recent run of balance-sheet-repair-driven global economic weakness, and that, based on an historic analysis of money supply during periods when there was a gold standard a five-digit price for the yellow metal is entirely rational.

These and other articles of gold faith ignore the very simple fact, pointed out by Guy Debelle, the Assistant Governor of the Reserve Bank of Australia, during a speech in Canberra on Tuesday, that “if you think about the intrinsic value of gold, there’s not a lot.”

Gold, as Barry Ritholtz notes, has no cash flow, no earnings, no coupon, no yield. Arguments in support of its purchase are basically very broad summations of macroeconomic trends, not analyses of “fundamentals.” Gold is the quintessential “greater fool” trade. As Mr. Debelle noted, “Gold often has a high price because people believe that other people believe that it’s worth a lot.”

It’s important to note that over the past two years-plus, as the US Federal Reserve’s program of “quantitative easing” has ramped up, gold has essentially run in place. There’s been no inflation-fear spike–there’s been very little inflation, in fact–and despite consistent claims that they’ll soon shoot disastrously higher interest rates remain near all-time-record lows.

Gold at these levels may provide a compelling entry point for a hedge or a trade. But it’s not an investment, at least not in the sense that we observe in Canadian Edge. We’ve focused and will continue to focus on buying and holding solid businesses that are growing and at the same time paying sustainable dividends to investors.

Up North

Gold’s rout, as well as weakness for other commodities such as oil, was, however, reflected in Canadian equity indexes. The Standard & Poor’s/Toronto Stock Exchange Composite Materials Sector Index, for example, which is the largest of S&P’s TSX sub-indexes with 59 companies, shed 7.6 percent in local currency terms on April 15 and is now down 25.5 percent year to date.

The S&P/TSX Materials Index is heavy with gold miners and mining services companies, the former subject to potential margin pressure, the latter exposed to reduced activity due to the lower commodity price. There are no S&P/TSX Materials components in the CE Portfolio.

The S&P/TSX Composite Energy Sector Index, meanwhile, the second-largest sub-index with 58 names, registered a 3.1 percent decline on Monday. This group, which includes 10 CE Portfolio Holdings, is down 1.1 percent, including dividends, in Canadian dollar terms in 2013.

Weakness in energy names is about falling commodity prices as well, as concerns about China returned following a disappointing gross domestic product (GDP) report out of the Middle Kingdom and the US Energy Information Agency trimmed its 2013 global oil demand forecast.

Brent crude futures declined by 1.1 percent to USD99.54 on the London-based ICE Futures Europe Exchange as of midday Tuesday, while the price of West Texas Intermediate (WTI) crude fell by 0.3 percent to USD88.44 on the NYMEX. Western Canada Select (WCS) was down 2 percent at USD73.75.

The front-month Brent grade traded at premiums of USD11.10, or 12.5 percent to WTI and USD25.79, or 35 percent, to WCS. WTI was USD14.69, or 19.9 percent, higher than WCS. WCS hit a record differential with WTI of USD42.50 in December 2012.

A reversal that’s narrowed the spread is in large part the result of spring breakup season in the Canadian oil patch reducing output and pushing up the price of WCS. Over the long term new infrastructure that will get output, including bitumen from the oil sands, to refineries in the US will bridge this price gap.

Much of the slide in the gold price has been attributed to a report that Cyprus’ central bank will begin selling down its stockpile, and that this signals other central banks of debt-ridden countries on the euro zone periphery will follow suit.

At the same time, however, China’s 7.7 percent first-quarter GDP number was below a consensus forecast of 8 percent and slower than the 7.9 percent expansion reported for the fourth quarter of 2012. The ability of Chinese, among whom the store-of-value mantra has taken deep root, may be a little less able to add to their gold holdings.

There are many periods in recent history where the price of gold has spiked to the upside, and there are an equal number of periods when it’s slid to the downside. It can go up and down, and it doesn’t respond in a predictable manner to the factors that its advocates say it does or will.

It, more than any other vehicle into which you might allocate your assets, is subject to emotional and, yes, political arguments that are significantly removed from fundamental reality. It has its purposes, but these are limited.

The Roundup

Here’s where to find analysis of Canadian Edge Portfolio Holdings’ fourth-quarter and full-year 2012 earnings.

Conservative Holdings

Aggressive Holdings

And here’s when Portfolio Holdings will report numbers for the first quarter of 2013. Those that have revealed firm dates for announcements are noted as “confirmed,” while we provide an “estimate” for those yet to make specific commitments.

Conservative Holdings

  • AltaGas Ltd (TSX: ALA, OTC: ATGFF)–April 26 (estimate)
  • Artis REIT (TSX: AX-U, OTC: ARESF)–May 7 (confirmed)
  • Bird Construction Inc (TSX: BDT, OTC: BIRDF)–May 14 (estimate)
  • Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF)–April 17 (estimate)
  • Brookfield Renewable Energy Partners LP (TSX: BEP-U, OTC: BRPFF)–June 7 (estimate)
  • Canadian Apartment Properties REIT (TSX: CAR, OTC: CDPYF)–May 9 (estimate)
  • Cineplex Inc (TSX: CGX, OTC: CPXGF)–May 10 (estimate)
  • Davis + Henderson Income Corp (TSX: DH, OTC: DHIFF)–May 8 (estimate)
  • Dundee REIT (TSX: D-U, OTC: DRETF)–May 3 (estimate)
  • EnerCare Inc (TSX: ECI, OTC: CSUWF)–May 15 (estimate)
  • Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF)–May 14 (estimate)
  • Keyera Corp (TSX: KEY, OTC: KEYUF)–May 8 (estimate)
  • Northern Property REIT (TSX: NPR, OTC: NPRUF)–May 8 (confirmed)
  • Pembina Pipeline Corp (TSX: PPL, NYSE: PBA)–May 3 (estimate)
  • RioCan REIT (TSX: REI, OTC: RIOCF)–May 3 (estimate)
  • Shaw Communications Inc (TSX: SJR/A, NYSE: SJR)–April 12 (confirmed)
  • Student Transportation Inc (TSX: STB, NSDQ: STB)–May 9 (estimate)
  • TransForce Inc (TSX: TFI, OTC: TFIFF)–April 18 (confirmed)

Aggressive Holdings

  • Acadian Timber Corp (TSX: ADN OTC: ACAZF)–May 1 (estimate)
  • Ag Growth International Inc (TSX: AFN, OTC: AGGZF)–May 15 (confirmed)
  • ARC Resources Ltd (TSX: ARX, OTC: AETUF)–May 2 (estimate)
  • Atlantic Power Corp (TSX: ATP, NYSE: AT)–May 7 (estimate)
  • Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF)–May 9 (estimate)
  • Colabor Group Inc (TSX: GCL, OTC: COLFF)–May 2 (estimate)
  • Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF)–May 10 (estimate)
  • Enerplus Corp (TSX: ERF, NYSE: ERF)–May 10 (estimate)
  • Extendicare Inc (TSX: EXE, OTC: EXETF)–May 8 (estimate)
  • IBI Group Inc (TSX: IBG, OTC: IBIBF)–May 10 (estimate)
  • Just Energy Group Inc (TSX: JE, NYSE: JE)–May 17 (estimate)
  • Newalta Corp (TSX: NAL, OTC: NWLTF)–May 8 (estimate)
  • Noranda Income Fund (TSX: NIF-U, OTC: NNDIF)–May 15 (estimate)
  • Parkland Fuel Corp (TSX: PKI, OTC: PKIUF)–May 8 (estimate)
  • PetroBakken Energy Ltd (TSX: PBN, OTC: PBKEF)–May 2 (estimate)
  • Peyto Exploration & Development Corp (TSX: PEY, OTC: PEYUF)–May 9 (estimate)
  • Vermilion Energy Inc (TSX: VET, OTC: VEMTF)–May 3 (estimate)
  • Wajax Corp (TSX: WJX, OTC: WJXFF)–May 8 (estimate)

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Dann Simpson

Dann Simpson

Wny do you send this as an E MAIL, but I cant print the e mail. but have to come to this site
to read it so much duplication of time and paper

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