The most accurate Gold price indicator we have seen yet (and it’s been bearish for months)

Update Dec. 30, 2013:

The indicator finally broke through the key $8.00 level on a move of over 2%,even as the GLD and GDX (gold miner) ETFs had limited gains on the day.  It could be that large money is coming back into this market, thus driving up the price of the fund.  Could this be a bottom on Gold?  Look for a follow up post on this subject based on our quantitative analysis.

Update Dec. 20, 2013:

The indicator wasn’t able to break through the $8.00 barrier, and likewise, Gold experienced a massive slam-down to break down below $1,200 this week.  Still waiting for the indicator to turn before trading Gold at all.

Update: Dec. 18, 2013:

Gold had a very volatile afternoon after the FOMC announcement, putting in a trading range of $40 from high to low.

So where did our indicator settle after all the dust settled?  Up 2% (13 cents to $7.81, which is 19 cents shy of our $8.00 bullish line in the sand.  This should be an interesting week.


Dec. 8, 2013

In April of this year, we were approached by a elderly lady who asked us to help with an investment portfolio left to her by her late husband.

The portfolio peaked in 2011 when it was worth in excess of $100,000 with capital invested of approximately $83,000, but since then the value had declined to $28,000 – a final investment loss of $52,000.

If you guessed that the portfolio was mostly invested in Gold, you would be correct.

To be precise, the portfolio consisted of gold mining companies held inside of an expensively-managed mutual fund.

Both Gold and Mutual Funds have been in the dog house for the past few years, so to be invested in both at the same time is cringe-worthy by today’s measure.   However, the original investment was made in 2008 – a time when it was one of the smartest investment moves around.

Here were the fund’s stats as of April 2013:

Core holdings: over 70 stocks, mostly Canadian equity mining (some oil/gas in the mix)

Chief Investment Officer:  holds an MBA and PEng with a past career in the mining industry

Co-manager: holds an MBA and also came from mining

With such vast mining experience of the fund managers, it’s no surprise that the bulk of the fund holdings is in mining.  In fact, if you wanted to invest in a mining company, these are the guys you would want picking them for you.

Look familiar?

The Gold Investment Hangover Fund

So then why did the fund have such a disastrous year?

Sure, the mining sector has fallen out of favour with investors, mainly due to the price of gold which many miners assumed would be  $1,500/oz for all of 2013.  Even today, Gold is trading well under that level and looks to be going lower.   (the market has priced mining stocks with the assumption that Gold will trade around $1,200 for the next year)

Perhaps the dismal fund performance is forgivable – after all, who knew Gold would trade down so low after the amazing bull run it had?  Well, these fund managers should have:  According to the fund’s quarterly report in December, 2012, not only did these managers have a chance to reduce their miner positions as the industry was entering a bear market, but they actually used the fund’s spare cash to double-down on their existing position of the companies they did own – a bet which turned out to be very wrong.

In the week following its precipitous drop last April, Gold subsequently rallied to $1,420..  at that point the mining companies held by the fund also started to show a recovery, but the Net Asset Value Per Unit of the fund did not rise even 1 cent and held at $9.25/unit.

The next week, Gold then rallied to $1,490, but the fund’s NAV was slightly down at $9.20/unit.

Then, while Gold fell to a low of $1,185 this summer, the fund’s NAV plummeted to $7.90 per unit.

Now that Gold has recovered to around $1,230 today (Dec 8), the fund NAV is even lower at $7.68!

How could the price of Gold go UP and the Mutual Fund’s value go down at the same time?

Many factors are involved in calculating a Net Asset Value of a fund (currency fluctuations, management fees, dividends, etc.) but it’s the redemptions of the fund units by panicked fund holders which can have the most impact.  With a plummeting fund NAV, you can bet that there were many investors who simply wanted out of the fund at any cost, and as a result of these unit redemptions, the fund value collapsed.

The Gold Barometer

While the story is saddening for our widow client (she dumped the fund at $9.00/unit based on our algorithm’s analysis), we have observed this fund to be an excellent measure of the sentiment for Gold and its related effect on in mining companies, with all of the critical market factors bundled in into the unit price:

1. A Mutual Fund with high fees that invests mainly in Canadian mining companies.

2. A team of humans managing the fund who are bound by the fund mandate which may be contrary to current trends.

3. A market price for Gold as reflected in the valuation of gold miners.

3. The number of investors who can prop up or deflate the value of the fund in the form of purchases and redemptions.

We find this fund to be a more accurate measure of the overall market sentiment for Gold and related investment than the Gold Miner ETFs such as GDX or GDXJ.

Where it stands today

The fund’s NAVPU has failed to rally along with Gold recently, and this has widely prevented us from taking any long positions. When the NAV of the fund crosses and holds above $8.00/unit, then we’ll be interested in Gold again.  If and when that happens, it could mean there are enough investors out wanting into the gold market so bad they’d be willing to pay management fees to invest in mining companies.  It could also mean that the fund managers (who are mandated to invest in resource companies with a bias towards mining) will not only be making some correct investing decisions, but they will also have an up-trend working in their favour which would be a more forgiving environment for any potential missteps they might have.

The name of this fund? It’s the DMP Resource Class A . There are no historical daily unit prices available on the site – we had to subscribe to the daily fund pricing bulletin and manually enter it into a spreadsheet and perform our own correlated calculations, but it has kept us away from the gold market.. for now.

 


The content contained in this blog represents the opinions of the authors who may or may not hold long or short positions in securities of various companies discussed in the blog based upon the authors' views. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied solely upon in making investment decisions, ever. It is intended for the entertainment of the reader, and the authors. In particular this blog is not directed for investment purposes at US Persons.
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