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A New Twist on Gold
According to recent statistics from the IFIC (Investment Funds Institute of Canada), Canadians have pumped hundreds of millions of dollars into mutual funds so far this year. The problem is investors have been dropping their registered retirement savings plan (RRSP) cash into bond, dividend and money market funds. These funds may not be the wisest choices. Bill Gross, manager-director of the world's largest bond management firm, Pimco, believes bond prices are about to crack. If the U.S. Federal Reserve raises interest rates, Canada will be forced to follow suit. Should that happen, Canadian long- and medium-term bond fund prices will fall. Normally, when interest rates go up, bond fund yields increase, too. But this offset takes time to occur. It usually takes a few years before bond funds can turn over enough of their lower interest yielding bonds to purchase better yielding bonds that will increase their interest dividends to unit holders. Rising interest rates make it more expensive for Canadian companies to provide goods and services. To remain profitable, Canadian companies have to pass along these increases to consumers who, eventually, will cut back on spending. This ultimately means lower corporate cash flow, lower share prices, smaller dividends and sub-par performance for Canadian dividend funds. Some market watchers, like Bill Gross and U.S. bond maestro Paul McCulley, believe interest rates will leg up in April or May of this year. The problem for money market funds is that anticipated interest rate increases will not be big enough or quick enough to have a major, positive impact on their respective yields. Their interest earnings will have to increase a good deal before investors see a return net of inflation and mutual fund management fees. So, is there an acceptable RRSP alternative? How about gold, platinum and silver? Until the end of 2001, precious metals bullion could not be held inside an RRSP. You could hold stocks of precious metals mining companies and retailers, but you couldn't hold actual precious metals in your RRSP. On January 15th 2002 the rules of the game changed. Business innovator and pioneer Nick Barisheff of Toronto-based Bullion Management Services Inc. was cleared by regulators to offer Canada's first and only retirement savings plan-eligible precious metals mutual fund that allows people to invest in real gold, platinum and silver bullion - The Millennium BullionFund. Ontarians could actually begin to invest in the fund in March 2002. It became available to all Canadians one year later in May 2003. Barisheff's fund was designed and implemented for a variety of reasons. Most importantly, the fund was created to give Canadian investors more investment choice and to provide investment portfolio insurance for their RRSPs. The Millennium BullionFund provides investors with protection from the various economic and stock market variables that have devastated many Canadian mutual fund portfolios over the past few years. This is partly because precious metals bullion is negatively correlated with stocks. History shows that, when stocks tank, precious metals rally for substantial periods of time (cf. U.S. markets circa 1972-1980). How does this precious metals fund protect investors? After reading the fund's 2004 Simplified Prospectus and Annual Information Form, it seems to me that there are two major reasons why investors would want to own The Millennium BullionFund. The first has to do with the operation of the fund. The second has to do with protecting your capital from external, negative economic developments. The fund invests solely in gold, platinum and silver bullion at spot market prices. Whatever the daily prices are for gold, platinum and silver are the prices the fund pays. The investment mandate of the fund is to split each investment dollar equally among the three metals. So, regardless of market conditions, one-third of every dollar is invested in gold, one-third in platinum and one-third in silver bullion. This simple investment method has a special benefit for investors. If you've been put off by the long string of debacles, lies, and profiteering on the part of big brokerages, corporations and mutual fund manufacturers, then The Millennium BullionFund is likely the fund for you. The fund has a fixed investment policy to simply buy and sell gold, platinum and silver at current spot market prices. This means that, unlike most other mutual funds, it does not require any extensive management. It doesn't need to rely on the expertise, or lack thereof, of an external portfolio manager. Unlike all other mutual funds today, The Millennium BullionFund holds unencumbered, allocated physical bullion. While traditional financial assets, like currencies or securities are liabilities of the issuer, precious metals, in bullion form, are not anyone else's liability. Furthermore, the value of bullion isn't based on a promise of performance like traditional financial assets, either. Its value is subject only to market valuations, never to the many factors that often impact stocks, such as corporate management performance, expenses, fraud, insider trading, lawsuits, manipulation, profit and loss, and stock valuation. Neither does the fund need a huge operations system. Other than insuring that money is invested and redeemed in a timely fashion, there is no cumbersome management structure to impede your profits. More importantly, you don't have to worry about losses because of conflicts of interest, fund management ineptitude and shady internal shenanigans. What about your bullion? The fund's assets are kept under lock and key in a precious metals vault owned and operated by the fund's custodian, the Bank of Nova Scotia. To insure absolute integrity, the fund's assets are audited on a regular basis by accounting firm Ernst and Young and the fund's management company, Bullion Management Services Inc. To top it off, the fund's entire portfolio is insured at market value against destruction, loss and theft. According to the fund's legal experts at Faskin Martineau DuMoulin LLP, the assets of the fund are not subject to seizure by creditors of either the custodian or the fund's management company. The fund's precious metals holdings cannot be co-mingled with either the bank's own holdings or any other party's holdings. The Millennium BullionFund is a mutual fund trust, which means it's a separate legal entity apart and distinct from the fund's management company and trustee. Okay. So the fund and its assets appear to be bulletproof. How can it help my current mutual fund portfolio? According to Barisheff, it starts with the fund's investment mix. Owning gold and silver protects the value of your capital during periods of rising interest rates and inflation. During stable or deflationary economic times like we've experienced recently, platinum and silver typically outperform gold. Between the three metals you reap the rewards of a balanced investment. Owning gold, platinum and silver bullion can really pay off during periods of economic, governmental and social instability. When people feel threatened by external circumstances, they tend to purchase precious metals. This isn't surprising. Gold, for example, has a 6,000-year recorded history. Most historians of money note that gold, platinum and silver have always been perceived by people as the ultimate store of value. This is the endearing, intrinsic character of precious metals. If you took an inventory of what's going on in the world today you'd conclude, as I have, that it's comforting to have something substantial like gold, platinum and silver in an RRSP, rather than mere paper securities such as stocks, preferred shares, long bonds and certificates of deposit. Consider the following: The world's reserve currency, the U.S. dollar, is in trouble. Americans face the very real prospect of rising interest rates and inflation. Iraq and now Iran are contributing to a rising tide of instability and the potential for a disruption of Middle East crude oil supply, which could drive U.S. domestic interest rates and inflation into the stratosphere. Japan, the second largest world economy, is still wallowing in a 20-year deflationary spiral with no monetary maneuvering room available, except to sell U.S. dollars and force down its value, causing even higher domestic interest rates and collapsing bond prices in the U.S. While unknown to many financial experts today, China has a looming bank crisis on its hands. Like Japan, the only way China can protect its economic welfare is to dump its huge reserves of American dollars, which will in turn exacerbate an already huge U.S. currency crisis. The U.S. has
massive, unsustainable debt levels, comprised of federal and
state budget shortfalls, falling income tax revenues, and real
estate-financed consumer spending, which is hurting the world's
confidence in a U.S.-led productivity miracle; this loss of confidence
is compounded by unprecedented U.S. trade deficits. Should these
countries decide the U.S. dollar isn't worth the risk, they,
too, will sell U.S. dollars Capping these issues is the horrendous problem associated with derivatives and derivative exposure by some of the world's largest U.S. banks. With more than US$33 trillion of derivative financing backed by only US$700 billion in bank equity, J.P. Morgan Bank is in a potentially disastrous position. Could J.P. Morgan be an accident looking for a place to happen? All of these issues make for good reasons to buy precious metals now. If only one of the above issues played out, it would result in a tremendous positive burst in precious metals prices. If you're looking for a little more financial security than you've got now, The Millennium BullionFund is likely the best choice for your RRSP. Before you purchase units in the fund, there are a few issues you should address. I have summarized them in point form below. Pros The fund is
currently value-priced when compared to the potential upside
for precious metals prices. It is safe and secure from corporate malfeasance, excessive operations costs, fund mismanagement and government interference. The fund's holdings are insured against loss due to destruction, loss and theft. Its assets are liquid and available to unit holders on any business day. Your minimum initial investment is $500 with monthly contributions of $100 or more. The fund is offered on a negotiable front-end basis and on specially reduced fees for wealthy individuals and institutional investors. Cons The fund's management fee is 2.25% per year, which is higher than many regular mutual funds, but par for many specialty mutual funds. There is an early withdrawal fee of 2% of the value of your holdings should you withdraw from the fund within 90 days of investing. The fund pays no dividends whatsoever, making it a pure growth play. The Millennium BullionFund has a high MER of 4.06%. High MERs are usually the province of young mutual fund start-ups and often decline as front-loaded expenses decline and more investment capital flows into the fund.
For more information you can visit the fund's website. Stephen Gadsden Copyright ©2004
Stephen Gadsden. All Rights Reserved. |
and pound the currency into the basement
along with North American stock markets.