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Fool’s Gold: End Of An Era

By
Dave Nadig
December 16, 2013
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With gold’s decline, an entire precious metals industry is in peril.

For those of you who regularly read my stuff, you know I love to write about charts and numbers and all sorts of nerd-ery. In this blog, I’m only going to use a single chart. If you’re a gold investor, you know which chart I’m talking about:

GLD_Price_Since_Fall_2011

Chart courtesy of StockCharts.com

This is the nightmare chart for gold investors. The price of gold has collapsed from all-time highs of slightly more than $1,900 an ounce in fall of 2011 to near $1,235 today.

Just this year, gold investors, a lot of them investing through ETFs like the SPDR Gold Trust (GLD | A-100), are down almost 27 percent, while investors in the SPDR S&P 500 Trust (SPY | A-98) are up 27 percent. You don’t need to be a math whiz to recognize that this has been a terrible, terrible year for anyone who made a big rotation out of equities in the last few years and into the shiny stuff.

And while it’s easy to kick people when they are down, here’s the thing: It’s not just gold investors who got hammered. It’s an entire industry that’s been built on the back of the gold rally.

Consider GLD all by itself for a moment. GLD’s peak NAV in August last year was $184.59. On that day, there were 424 million shares outstanding, for net assets of more than $78 billion, with an implied annual fee due of $313 million a year.

Today assets stand at just $33 billion—well under half their peak, with an implied fee base of $131 million a year. That’s nearly $200 million that’s leaving the GLD management ecosystem.

I’m not expecting anyone to feel sorry for the poor ETF issuer here (State Street and the World Gold Council). Rather, I’m pointing out that decline in gold has made for some rather dramatic shifts in the investment economy.

Consider Eric Sprott. I first came to know of Sprott when his Physical Gold Trust launched in 2010—right in the froth of the run-up—and it was being called an “ETF” by various media sources (it’s not; it’s a closed-end fund). At the time, I ripped it apart for tax issues, poor marketing and various other shortcomings.

That’s nothing to the savaging Sprott received at the hands of one of the smartest bloggers on the Web, Kid Dynamite. Kid Dynamite has made a kind of sport out of watching how Sprott’s closed-end funds magically become un-closed and issue new shares when they trade to large premiums.

Nothing wrong there, other than the fact that the big recipient of those nonpremium shares tended to be other Sprott funds, who could then sell them for the premium price. Nice work if you can get it.

But while the various shenanigans may have worked on the way up, they’ve brutalized the company—and Eric Sprott—on the way down. Take their flagship closed-end gold fund, PHYS. It launched on Feb. 26, 2010. GLD investors are up 9.09 percent since then. PHYS investors are up 6.36 percent. I don’t know how you leave 1 percent a year on the table when your only job is to buy gold and stick it in a vault, but there you have it.

The good news (if you’re actually in one of Sprott’s many funds) is that Sprott himself has gotten the ax, as noted by the extraordinarily unkind headline at Business Insider this morning: “One Of The Most Famous Gold Bug Fund Managers Has Gotten Obliterated.” The Wall St. Journal article is a bit more professional—“Gold Drop Is Blow to Prominent Hedge-Fund Manager Sprott”—but makes hay out of the fact that his namesake hedge fund is down 50 percent in 2013. That takes work.

In the end, Sprott’s getting the boot, and being replaced by new management.

 

ETF DAILY DATA

The oil funds 'XOP' and 'OIH' gathered money on Thursday, April 16, helping lift total U.S.-listed ETF assets to a record $2.158 trillion.

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