Gold

EdGasket

masonic wrote: »

If you want some alternative ETFs that have, over the last 3 years, approximated 2X gold here are some options:
iShares MSCI World
ETFS Short CAD Long USD
Global X China Industrials
iShares MSCI Hong Kong Index

None of those are speciality gold funds. SPGP is 100% invested in gold miners. You take a graph that existed before this fund was even launched and use a different currency to prove that the link of SPGP to the gold price is not 2X. All I can say is that in GBP SPGP is leveraged to the gold price of appprox. 2X over recent years. If the gold price moves significantly higher then this multiple might increase as obviously any increase in gold price from here is all profit to the producers who have cash costs around $1000. Similarly if the gold price approaches the cash cost of producers then SPGP will fall more as the producers become unprofitable. However as someone who actually invests in SPGP, I have compared daily prices with SGLN which is a pure gold fund in GBP and the price movement in SPGP is approx 2X and although not exact, is good enough for me and probably anyone else who wants a leveraged gold play ETF not based on derivatives.

bowlhead99

Because we're talking about the operating leverage driven by variable pricing but fixed costs, the effective rate of leverage to profits - and ultimately, company value - is going to vary significantly across the range of prices.

For example if the production cost of the gold miners is $1000 and the sale price of gold is $1500, a miner makes $500m from its million ounces dug up every year. If the sale price falls 10.7% to its current price of $1340, the miner makes $340m from its million ounces dug up, which is a drop of 32%. So the 10.7% drop of price is levered up pretty much exactly 3x to 32% drop of profitability.

But then from a price of $1340/ profit $340m, if the sale price falls or grows another 10%, that is down to $1206, or up to $1474. The resulting annual profit of $206m or $474m is 40% lower or higher than $340m. So that price drop has been amplified to hit profitability 4x the price change, not 3x.

Imagine the gold price is at $1200 ($200m a year profit) and it drops 20% to $960. With production costs of $1000/oz it is not worth operating the mine at all other than to keep it ticking over; the profit drops 100% to zero if you stop operating it and sack everbody or drops 112% to an annual $40m loss if you want to keep digging up a million ounces a year just for fun.

In reality mining companies aren't solely valued on a multiple of their current year profits and if you wanted to buy the company or its mining licences and operations you would look at some combination of profitability and value of reserves (at some implied NPV). But an observation that the mining investment fund returns are 'about 2x levered to gold price' is pure coincidence / chance really, because the leverage should depend where the gold price currently is; Masonic's observation on the returns over 10 years kind of blows the concept out of the water.

EdGasket

Yes I do understand all that. All I innocently said was that I had some of my portfolio in 2X leveraged gold (which to all intents and purposes is what it is right now); I really wish I had said nothing more now!

bowlhead99

Hehe, you should have known better than to say something vague and innocuous on a forum packed with investment / maths geeks and pedants

As a side note, just to pick you up on another point, you mentioned that if the gold price moves significantly higher, the multiple might increase. The opposite is true really. The annualised profits, or valuation, would increase drastically of course, but the multiple would be static or fall, depending how you measure it.

If you take our imaginary miner with running costs at $1000 and sale price of $1500. His profit is 1/3 of the starting sale price which effectively gives a 3x multiple. So if the sale price rises 10% to $1650, his profit falls or rises by 30% from 500 to $650. Or, if the sale price rises by 50% to $2250 his profit rises 150% to $1250. Whatever happens to the sale price from its original level of $1500, the dollars of profit (which drives the share price) will move by triple that percentage.

But if the sale price is already at $2000 with the same $1000 cost price, the margin is no longer as low as 1/3, it's 1/2 and the effect of leverage is to give a sale-price-to-profit multiple of not 3x, but 2x. Now if sale price goes up by 10% to $2200, profits go up 20% from $1000 to $1200. If sale price went up by 400% to $10000, the profit would go up 800% to $9000.

So the level of leverage depends where you start from. The higher the sale price relative to cost, the lower leverage you have. For example if gold cost $1k an ounce to mine and you could sell it for $100k an ounce, you pretty much have no leverage at that level because a doubling of sale price pretty much just doubles your profits and there's barely any multiplier effect on it.

As such, it can't be right to say, "If the gold price moves significantly higher then this multiple might increase". By contrast, the multiple should stay broadly the same (in terms of total price movement to total value movement measured from your start point of say $1340 today), or fall (in terms of individual daily movements in price no longer being amplified to the same extent in coming up with movements in projected profit / value).

For example if your mining companies all started selling at $300,000 an ounce, this would magnify up to a massive leap in profits/value, but the 'magnification rate' of 2x or 3x selling price growth to share price growth would only be about the same as if the price had risen to $30,000 or $100,000 instead. And going forward from those levels with an extremely high gold price relative to cost, there would barely be any observed leverage from day to day as it is no longer a high-fixed-costs industry.

Sorry to labour the point as I appreciate it was only an offhand comment anyway

masonic

EdGasket wrote: »

None of those are speciality gold funds. SPGP is 100% invested in gold miners.

I was being facetious. My point is that a fund that coincidentally returns 2X the gold price over one specific, cherry-picked period of 3 years, but over 1 year or 2 years or 5 years has completely different returns relative to gold, is not exposure to 2X gold. Unless you only hold for that specific period (and you cannot know in advance what that period will be). Something that could be considered to track the gold price with 2X leverage would do so consistently over multiple time periods, and through that consistency one could predict it would continue to do so. That isn't the case with SPGP. The variations in that case are pretty wild.

You take a graph that existed before this fund was even launched and use a different currency to prove that the link of SPGP to the gold price is not 2X.

I also took a graph that only included the period this fund was running using the same currency and showed exactly the same thing (see post #15).

All I can say is that in GBP SPGP is leveraged to the gold price of appprox. 2X over recent years.

No it is not. Over the last year it has been 3X, the year before that it was 4X, the year before that it was <1X and the year before that it was 2X. The average over the history of the fund is about 4X.

However as someone who actually invests in SPGP, I have compared daily prices with SGLN which is a pure gold fund in GBP and the price movement in SPGP is approx 2X and although not exact, is good enough for me and probably anyone else who wants a leveraged gold play ETF not based on derivatives.

Well it isn't good enough for me (as you might have already concluded), and so far nobody other than yourself has weighed in saying that they would be happy to use this for the purpose of getting 2X gold exposure. If you are day trading, then you are probably right about daily movements, but I am an investor, not a trader. As you say, and I have no reason to doubt, daily prices are about 2X + or -. The trouble is, those +'s and -'s are not distributed randomly. They are there because of other influencing factors on the price of this ETF. Their cumulative effect is magnified, such that over longer periods, the ETF may drift anywhere between <1X and >4X, averaging out at about 4X based on the data so far (with the caveat that the index, over a longer period, the multiple is negative).

badger09

bowlhead99 wrote: »

Hehe, you should have known better than to say something vague and innocuous on a forum packed with investment / maths geeks and pedants

As a side note, just to pick you up on another point, ......................

:rotfl::rotfl::rotfl:

MattGb

It's too volatile to be worth the risk for any normal portfolio at the moment

EdGasket

MattGb wrote: »

It's too volatile to be worth the risk for any normal portfolio at the moment

That's a rather strange view. Gold is more stable than a lot of shares and even some funds. The idea of it is to complement the portfolio to act as a kind of insurance against shocks (it did very well after brexit and the credit crunch) and also to help mitigate inflation.

grey_gym_sock

if you know where the gold price is going, you can of course buy when it will rise, and sell before it falls ... but nobody can do that all the time.

for people who don't know where the gold price is going (i.e. in reality, everybody), IMHO the only good reason you might want to hold a little gold is because it's volatile.

why so?

well, the long-term real (i.e. after inflation) return on gold is very low - approximately 0% - similar to the real return on cash. if you want a high expected return (and can put up with high volatility), you should hold shares or property. and if you want stability (and can accept low returns), you should hold cash (or for the longer term, perhaps gilts which will mature no later than when you'll be spending the money).

(yes, i know the £ has just fallen by about 10%, but what you can buy with a £ - assuming you are spending it in the UK - has only fallen by a few %, since not all things you buy are imported. and that's an extreme event for the £.)

so what is the point in gold, with low returns and high volatility? the point might be that you could allocate a small fixed percentage of the your portfolio to gold (e.g. 1%), and then when gold rises sharply (so perhaps you now have 2% gold) you sell some of it, to take you back to 1% gold; and when it falls sharply (so perhaps you have 0.5% gold), you buy more, to take you back to 1% again. in this way, you can hope to automatically (i.e. by following a fixed plan) buy gold when it's cheap, and sell it when it's expensive, thus benefiting from its volatility.

having said that, i don't follow that plan, and hold no gold at all. you can have a sensible portfolio with no gold. but i don't see anything wrong a portfolio with a small allocation to gold, providing it's done in a disciplined way.

too much gold is not sensible. and being confident of short-term moves in the gold price (e.g. over a year or 2 or 3) is not sensible. if you hold gold, you should have a clear plan about what you'll be doing with your holding (i.e. selling or buying more) after any possible price move. the simplest clear plan is probably having a fixed % allocation to gold which you'll maintain. other plans are possible, but you need to be careful that you're not slipping into wishful thinking. it's very easy to slip into psychological traps in investing - and not just with gold.