Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Make an Income from Gold Investments

Commodities / Gold & Silver Dec 20, 2007 - 12:55 PM GMT

By: Adrian_Ash


"Christmas is coming, the champagne's getting flat; "Please put a penny in the old broker's hat..." – David Phillips, The Chart Prophet

ONE OF THE BIG stumbling blocks for investors thinking about gold is that it doesn't offer to pay any income.

That's why bone-headed gold schemes turn up like Simon Cowell at a botox clinic.

But just as better living through chemistry can make you smile for a while, so "enhancing" the Gold Market looks doomed to leave your face sagging in the end. Gold Link Income Plus, a Sydney-based fund manager that floated on the ASX in July 2005, raised some A$150 million from investors (US$129m) since opening in 1998.

Now it's got barely one dollar in seven to give back.

The 86% loss came after "seven really good years and one bad year," as the founder, Richard Kovacs, told The Australian in early December. "That big loss has destroyed my business and my credibility."

It has also left with A$20m earned in nine years, apparently, and the multi-level marketing-type name should have given it away – Gold Link Income Plus. But you might struggle, as we do here at BullionVault , to see quite how "gold" and "income" can ever sit together in the same product. Not one that actually keeps working, that is.

"The age old problem with bullion," as the Sydney Morning Herald announced to its readers in Feb. 2006, "is that while gold might be pretty to look at, it hasn't paid interest or dividends.

"No more. Gold Link's Income Plus Fund trades like a share (code: GLI) and pays a fully franked dividend four times a year – totaling 10 cents – by borrowing gold cheap from central banks and selling it in the futures market and investing the proceeds."

Or rather, according to The Australian in its report at the start of this month, "the company operated a trading strategy betting that volatility, or fluctuations, in Gold Prices would remain constant or increase."

Whichever route Gold Link actually followed into gold options, as the Gold Market has soared since mid-2005, it also took a series of breathers, knocking volatility lower and destroying anyone betting that volatility would keep rising.

"The scheme wasn't model driven [and] it wasn't human error," pleaded Richard Kovacs in late November, just before the rest of the Board joined him and quit on the eve of an angry shareholders' meeting.

"The fact is," Kovacs went on, "the global options market fell and fell from late 2006 into 2007 and that adversely affected the value of our portfolio." And he was so close to getting it right!

Price volatility in the Gold Market has since shot higher. "One-month volatility rose from a low of 10.8% in July to 17.4% in November," notes Jessica Cross in the latest Yellow Book from Virtual Metals. "Day-for-day," agrees Wolfgang Wrzesniok-Rossbach at Heraeus – the German refinery group – "the inter-day movements in Gold Prices have been larger than what used to be the complete trading range for a whole quarter."

"And within this highly volatile market," he adds, "gold continues to hold on to its generally upward trend."

Indeed, holding physical bullion – and leaving it well alone – would have matched the 15% yield squeezed out by Gold Link Income Plus pretty well over the last half-decade, for US investors at least.

Gold hit new record highs for Australian owners in November this year, just as it did British gold buyers. Anyone trading in US Dollars, meantime, could have enjoyed an annual "income" from gold – selling their gains each New Year's Eve, and then using that yield to live off for the coming 12 months – of 17.6% gross on average since the start of 2003.

In a bull market this strong, why meddle with options at all? Why not just Buy Gold and hold it?

Well, firstly of course, only an idiot would put all of his money into a non-yielding asset – or so your financial advisor would say. (Just ask him yourself; he could probably do with a laugh this Christmas.)

Second, there was no guarantee the price of gold would keep rising, but with Gold Link's system, it "[was] not essential for the gold price to rise," as the Sydney Morning Herald noted at the start of 2006. For the first couple of years, Gold Link managed to make bankable cash out of flat and even falling gold prices.

Last, but not least, running a complex gold-trading program pays management so much more when you're doing something clever that your investors don't quite understand.

"Since it started six years ago," the SMH added in 2006, Gold Link "has posted an annual pre-tax return of about 15% after taking out the 1.75% management fee and a quarterly 15% performance fee."

Now you're talking! Fifteen per cent of your clients' profits – plus a 1.75% annual yield from their investment dollars – sure beats scraping by on 0.8% dealing commission like we do at BullionVault . (Our gold-dealing fees fall to 0.4% and then down to 0.02% for bigger, more active traders.)

"It simply beggars belief that Mr Kovacs has continued to claim these huge fees as manager despite the huge losses," says David Woodiwiss – one of 3,000 investors now expecting the return of just 20¢ on the dollar, rather than a return of 15% per year – to The Australian in early December.

Richard Kovacs is reckoned to have paid himself more than US$17m for running these funds into the ground. But to be fair, he was worth every penny – as along as it lasted – for squaring the circle of gold vs. income.

You see, financial service firms the world over hit a big problem when they give in to demand and sell gold to private investors. For the damned stuff flatly refutes everything else your financial advisor will tell you.

First, gold doesn't pay you an income. Indeed, it costs you to own it unless you buy "unallocated" gold, swapping your storage fees for risking your gold on somebody else's balance sheet.

The charges for owning gold outright, on the other hand, can soon add up to 2% or more of your bullion's value each year. That soon eats into your wealth faster than most actively-traded mutual fund fees.

So capital appreciation – in terms of your domestic currency – remains the gold buyer's one hope. And this lack of income sets gold, like all base commodities, far apart from the paper bonds and equity shares that pay brokers their fees and set up commission trails for advisors.

Even if a stock holder doesn't receive a dividend this year, at least he or she can expect stock-price appreciation as the rest of the market bets on future returns showing up soon after the board chooses to split profits with the company's owners.

At least, that's what Google stockholders must be telling themselves...up there at a price of 54 times earnings right now.

The net result of dividends or capital growth, however, can sometimes prove hard to distinguish. It's a cash gain either way, whether realized or not. And your financial advisor will always advise that real, long-term wealth comes from rolling this year's earned income back into your holdings.

Re-investing your dividends like this will then sprinkle the magic of compound interest onto your wealth – "the eighth wonder of the world," as Albert Einstein once said. And who'd want to turn away Tinkerbell?

But once you've built up your wealth, you can't eat re-invested income. Which is why retirees and pension fund managers know only too well the financial industry's other great standby:

Stocks are for growing your money; bonds then pay out in retirement.

Like most received wisdom, however, this is simply "a bad idea whose time has gone," as Linda Stern writes for The theory that "retirees should keep a lot of their money safe in bonds" just doesn't stack up, she explains, pointing to a study by Tom McGuigan at the Burns Advisory Group in Connecticut . He tested different portfolio mixes against typical retirement withdrawals, testing them over a range of three-decade periods, and starting with a 5% drawdown in the first year.

These imagined withdrawals then grew by the rate of inflation each year...and McGuigan's got bad news for anyone hoping to eat or keep warm at, say, 90 years of age after retiring at 60:

Bonds just don't pay.

"The all-bond portfolio was the big loser," says Stern. "It only lasted 30 full years in three of the 26 periods tested. But the 60/40 mix wasn't that much better. It succeeded less than half of the time, lasting 30 years in just 11 of the 26 periods tested."

Putting all of your money into the S&P, even during the greatest bull market on record, would have fed and clothed you with only a 69% success rate. "The only portfolio that had a 100% success rate," the study found, "was a completely diversified portfolio of stocks that included shares of large and small companies and growth and value companies."

Looking ahead today, however, pensioners and near-retirees – as well as pretty much everyone else trying to grow their money in 2008 – have got to wonder: What happens to that 100% strike-rate for broadly invested stock holders if growth now gives out?

Nearly one-third of retirees holding just S&P500 stocks would have come up short since the end of the 1960s. The only sure route to surviving the full 30 years of McGuigan's study was to allot a portion of money to small-cap and growth shares as well.

But cut out the '80 and '90s boom in growth shares, and how many "completely diversified" stockholders would have spent the last few years of their life eating from trash cans instead of feasting at Tootsies?

Throw in the gnawing inflation – and falling stock earnings – of '70s-style stagflation, and you might come to ask whether stocks now offer anything near a livable income for retirees today.

Trying to live off an "income" paid by gold bullion, in contrast, is a crazy idea no financial advisor would dream of. But at least the dead metal preserved wealth throughout the Seventies. If inflation keeps rising on the fresh tide of Fed rate cuts, gold might just beat stocks and bonds yet again in 2008.

By Adrian Ash

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2007

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in