THURSDAY, MAY 27, 2010
Time to Take a Breather from the Gold Rush?
By RANDALL W. FORSYTH
The surge of money into gold funds suggests a pause -- but no more -- in the long-running bull market.
DON'T YOU HATE IT when your favorite spot becomes too popular? Service goes down and prices rise. Pretty soon, you're agreeing with Yogi Berra, who famously observed that "nobody goes there any more, it's too crowded."
So it seems with gold lately. The metal's price spiked to a record $1,249 an ounce a couple of weeks ago before succumbing to profit-taking that took it below $1,180 last week. Wednesday, however, the metal popped back above $1,200, with the June futures contract settling up $15.40, to $1213.40 on the New York Comex.
Most readers probably don't trade futures but express their preference for gold through funds that trade like stocks through traditional brokers or with a click of a mouse through an online broker. And money has gushing into those exchange-traded vehicles lately.
For instance, the immensely popular SPDR Gold Shares exchange-traded fund (ticker: GLD) has seen an influx of money that has hugely expanded its net assets in recent weeks. The ETF, each share of which represents the ownership of one-tenth of an ounce of gold, has become the favored way to play gold. That's not only for regular folks who don't have a safe deposit box on Grand Cayman but also for hedge-fund honchos such as John Paulson, who made a billion or so betting against subprime mortgages.
Since just the beginning of May, GLD (almost everybody refers to the ETF by its symbol) has increased its holdings of gold, from 37.263 million ounces to 40.755 million ounces as of May 26, according to its web site (http://www.spdrgoldshares.com/.) Between the burgeoning volume and the rise in gold's price, GLD's NAV soared to $49.4 billion from $43.9 billion since the beginning of May, a 12.4% increase in a matter of weeks.
The effects of gold fever could be seen in a newer, lesser-known fund, the Sprott Physical Gold Trust (PHYS), a Canadian-based closed-end fund run by well-known hard-money manager Eric Sprott.
To step back for a minute, there are significant differences between an ETF such as GLD and a CEF such as PHYS.
While a closed-end fund also trades on an exchange, a CEF has a set number of shares outstanding while an ETF issues new shares to accommodate demand from investors. As a result, closed-end funds can and will trade at substantial premiums and discounts to their NAVs, depending on investors' ardor for the fund.
So great was the demand for PHYS that it commanded a premium of as much as 30% over NAV when gold hit its peak a couple of weeks ago, and traded fairly steadily at a premium of 20% or so.
In effect, the Sprott fund held dollar bills for which the market was willing to pay $1.20. You don't have to be Warren Buffett to figure out what trade PHYS would make. Sprott did a follow-on offering of $243 million of shares at $11.25, which resulted in its outstanding shares plunging 8.5% Wednesday even as GLD gained about 1%.
That's because the premium over NAV on PHYS narrowed sharply while the value of the Sprott fund's assets increased with the price of gold Wednesday. Even so, PHYS still commands a hefty premium of 12.87% over its NAV.
The willingness to pay more for an asset than its intrinsic value typically is a sign of excessive exuberance. So, too, is a headlong rush into an asset, as with the rapid expansion of the assets of GLD.
Does that send a sell signal for gold? Hardly. In the words of Richard Russell, the long-time editor of the Dow Theory Letters:
"Gold is in a huge, long-term bull market. My experience with in-and-out trading in a primary bull market is that you tend to be 'out' just when you should be 'in.' The best method of dealing with a bull market is to 'ride the bull' the way rodeo bull-riders cling to their bulls -- and stay on the bull as long as you can."
.Comments: randall.forsyth@barrons.com
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