Lust for Lustre

ANNALS OF IRRATIONAL EXUBERANCE
Gold Bugs Bug Out
Investors in love with shiny stuff are forever blowing bubbles

Alex Roslin
Wednesday, March 26, 2008
Business Observer
The Montreal Gazette
[original story]

It's a great time to be a gold bug. With gold punching above $1,000 U.S. an ounce for the first time ever this month, small-time investors are pouring into gold.

And despite bullion's lofty prices, gold bulls say this is just the beginning as concerns about the subprime apocalypse drive investors to safe-haven assets.

Frank Holmes, CEO of U.S. Global Investors, predicted recently gold would soon top $2,000. Even wilder forecasts surround silver, which briefly peaked above $20 an ounce earlier in March. One gold-market website cited some analysts who insisted silver would explode to $135 to $200.

It reminds me of the last days of the dot-com craze in the late 1990s when the talking heads on the financial news extolled the virtues of ridiculously overpriced Internet companies that would soon prove to be worthless.

Remember the book DOW 36,000, which predicted the Dow Jones Industrial Average would soon triple in value?

That was in Oct. 1999 when the Dow was at 10,000. Alas, it peaked at 11,900 just three months later, then did a swan dive to below 7,500.

Now I'm not suggesting gold is as worthless as a dot-com shell company. Historically, an ounce of gold has always tended to be worth about the price of a men's suit. So you can be reasonably sure it will at least put some clothes on your back.

On the flip side, gold is probably subject to more speculative craziness than nearly any other market. This is after all the metal that helped inspire the Spaniards to settle the Americas and spawned sundry gold rushes.

For some reason - maybe because it's so shiny - gold drives lots of folks to wacky extremes. Gold bugs got their name from a movement in favour of the gold monetary standard in the 1890s, whose supporters wore lapel pins of small insects.

For many gold bugs, holding bullion is actually as much a political decision as one about investing. They don't believe in paper money, central banks or have much fondness for liberal ideas like the welfare state.

I see them as the market version of those backwoods survivalists who like to stock up on canned goods and ammo.

The most hardcore gold bugs have been proselytizing for bullion for a long time. Some have actually been waiting for the current gold ramp-up for the past 28 years, ever since 1980 when gold spiked to nearly $900 before it crashed and spent the next two decades ambling around between $250 and $500.

I recently had the pleasure of getting acquainted with some of these folks through a market blog I write. When I reported that my trading system had given a sell signal for silver, I got about 150 livid emails and blog comments-10 times the usual number for anything I'd else written.

"Dear Dufus," one started. "Gold and silver are buys not sells. ... Please get it right to save what is left of your reputation as a financial commentator."

"DUMP SILVER?!?!? Are you nuts?" another wrote. "You have to be crazy my man-get a clue about what's going on! SERIOUSLY-GET A CLUE !

One said, "Good luck with your future. I just bought more gold at $1,000.00/oz and may think about selling it at $1,650.00/oz."

What's supremely sad is to hear of small-time investors loading up on gold just as it again made record highs. I wonder how many were aware that gold and silver are some of the most volatile markets on the planet.

Here's what happened in May 2006: gold had nearly tripled in price to $730 from its 2001 low around $255. Like now, there was lots of talk it would inevitably rise far higher, perhaps to $3,000 or more.

Then, in the space of a month, gold crashed 26 per cent to $540. After that, it stubbornly seesawed up and down for over a year.

Now how do you think a typical investor reacted? Clearly, a good many sold at or near $540. We know that because this is the price where gold stabilized, signaling an end to the initial corrective selling pressure.

Many others would have held on for several months, but finally threw in the towel and took their loss in order to put money to work in the stock market as it took off in late 2006 and early 2007.

And that's when the major selling pressure in gold would have ended, allowing its price to finally break out of its long trading range last summer and unleashing the current ramp-up.

In other words, the latecomer little guys likely didn't participate in most of the recent rise.

Fast forward to today. After gold hit an intraday high of $1,033 on March 17, it crashed 12 per cent in three days. Sure, gold could double in price to $2,000. The question is, can you afford to wait another 28 years before that happens?

Alex Roslin is a journalist and active trader. His market blog is at COTsTimer.Blogspot.com.

[TAGS: gold bugs, gold investing, bullion, precious metals, market bubbles, silver]

Mutual Funds Results Sagging

In 2007, only 24% beat S&P/TSX index

by Alex Roslin
The Montreal Gazette
Monday, March 10, 2008

The rush to make contributions to Registered Retirement Savings Plans for last year is now closed, and you might be wondering where to park all those new funds.

If you’re considering a mutual fund, you might want to read a new report from market research firm Standard & Poor’s. It found the vast majority of actively managed Canadian mutual funds lagged the market last year.

Just 24 per cent of Canadian equity mutual funds outperformed the benchmark S&P/TSX composite index in 2007.

The numbers were even worse over the longer term. Over the past three years, only 13 per cent of the funds beat the index, while over five years, a mere eight per cent succeeded.

The figures were also bad in other categories of mutual funds. Among Canadian dividend and income equity funds, a dismal three per cent of active managers beat the benchmark dividend index over the past three years; over five years, not one of 37 funds beat the index.

In international equity funds, the results were a little better but still fairly miserable, with just 19 percent of active managers beating the market over three years and 13 percent over five.

The only categories in which a majority of managers beat the index in 2007 were Canadian small- and mid-cap equity funds and blended Canadian-focus funds that have a half-and-half split between Canadian and international equities.

In these groups, 52 percent of managers beat the market.

But over the three-year period, only 40 percent of the blended Canadian-international funds beat the index. Data was available for longer periods for the small- and mid-cap Canadian funds.

The reason for the lackluster performance? The main problem is management fees charged on investments in mutual funds, said Jasmit Bhandal, author of the report and director of Canadian index services at S&P Canada.

“It really boils down to the arithmetic of active investing,” she said.

“On average, 50 per cent of investors are above the market, and 50 per cent are below, so once you account for fund fees, most actively managed funds will fall below the market.”

The fees also explain the still-worse performance over the longer horizons. “Those fees are going to add up over time, so that’s why we see even fewer funds beating the indexes over the long term,” Bhandal said.

The underwhelming performance means investors “really have to do their homework to find the managers who beat the index,” she said.

But there’s another hitch. S&P’s research on U.S. mutual funds has found that it’s often not the same managers who beat the index from year to year, Bhandal said.

In other words, a fund’s outperformance one year may not reflect a skilled manager so much as chance that won’t necessarily repeat the following year.

Similar research has yet to be done in Canada, but Bhandal said some evidence here suggests the same randomness occurs in the results of Canadian mutual funds.

(As for the small- and mid-cap mutual funds, Bhandal said more of them may have beat the index because there “may be better opportunities to add value” in that space.)

Gavin Graham, chief investment officer at the Guardian Group of Funds, acknowledged that most actively managed Canadian mutual funds have underperformed their benchmarks. “Those are not particularly great numbers,” he said.

He blamed the lagging results on fees and the fact that it’s simply not easy to beat the markets, even for the pros. “It’s very rare to find people who can consistently trade well,” he said.

“It would appear there are not many who do this, but there do tend to be some who beat the market over time even after fees, while delivering less volatility.”

Graham said actively managed funds can in some cases offer less risk to investors because managers tend to reduce holdings of overvalued stocks. This can cause a fund to fall behind the market, but it may reduce an investor’s ulcer factor because the fund has less volatile swings.

Independent analysts blamed the weak mutual fund numbers on a combination of fund fees and mediocre investing decision-making.

“Most mutual fund managers focus on only one type of analysis—fundamental analysis. My opinion is they need more types of analysis, like seasonality and technical analysis,” said Don Vialoux, author of the DVTechTalk.com market website and a retired technical analyst who worked at RBC Investments.

(Fundamental analysts look at a company’s valuation measures like earnings and debt ratios, while technical analysis focuses on studying charts to spot price trends; seasonality looks at recurring market patterns that repeat at certain times of the year.)

Stephen Vita, a professional trader in Bradford Woods, Penn., and author of the AlchemyOfTrading.com website, said mutual fund performance has suffered because the most talented managers often leave to trade for themselves or start hedge funds.

“Most people who are any good leave. In the mutual fund business, you can’t make market timing calls, you have to be fully invested all the time, and you go down with the market when there is a bear, like now. That’s all they know. It’s no great secret on the street,” he said.

Vita got a trial-by-fire start in the investing business when he went to work as a mutual-fund salesman just before the 1987 market crash.

He was selling investors front-end-load funds that charged a large upfront fee as a percentage of the initial investment, plus annual management fees later on.

“I didn’t realize what an absolute rip-off it was (for investors). I didn’t know any better,” he said.

Vita and Vialoux both suggested investors consider exchange-traded funds, which passively track an underlying index and charge much smaller fees than mutual funds.

For more info:

Standard & Poor's reports on actively managed funds

Regularly updated list of Canadian and U.S. exchange-traded funds at Don Vialoux's DVTechTalk.com

[TAGS: mutual funds, investing, ETFs, exchange-traded funds]