On the face of it, gold appears a normal investment. With a shareholder base made up of institutional holders who are fairly steady and retail investors who tend to be loyal, this precious commodity looks like your average blue chip. However, unlike a bellwether’s stock certificate, gold can be turned into jewelry, packed into teeth or held by central banks as money.
As a commodity, gold is in a league of its own because it doesn’t produce anything tangible. With uranium, for instance, you could make electricity but with gold you have a non-performing portfolio asset.
In times of recession, gold represents the fundamental particles that so many investors look for as equities tumble: safety and security. Investors aren’t wrong to think of gold as a safe haven or even as a strong performer since the yellow metal has consistently outperformed the S&P 500 since the beginning of 2000.
Now that even the most egregious equity market cheerleaders caution that the stock market returns of the last decade are not going to be replicated anytime soon, the World Gold Council sees a renewed opportunity. The WGC, representing the globe’s gold producers, counsels the use of gold for jewelry, industrial uses and investment as well as lobbying the Central Banks to keep the stuff in their vaults.
Golden IR
With equity markets wobbling at the end of last year, the WGC hired London-based Capital Communications MS&L, a branch of Manning Selvage & Lee, to persuade institutions to ballast their portfolios with the weight of gold. ‘We do the investor relations for gold,’ boasts Richard Campbell, director of Capital Communications MS&L. ‘It’s a fascinating job, a real challenge compared to IR for a normal equity-based company.’
Some of the IR work Campbell’s team does for gold is routine: ads in the financial press, going to buy-side conferences, and above all, targeting. Campbell looks for funds that are already in metals or commodities and approaches them for one-on-ones. ‘We are also interested in very high net worth individuals,’ he points out, because many of these rich folk like the extra sparkle that gold puts in their personal portfolios. Campbell recounts admiringly a standard technique for emphasizing the emotional appeal of gold. His colleagues from the WGC will place a banknote in the outstretched hand of a potential investor and a gold bar in the other. ‘They leave their hand flat and open for the note but they always grasp the bar,’ he says.
According to Campbell, his goal with gold is to have investors put 4-5 percent of their assets in this glittering commodity. In other words, he does not suggest people sell up their shares and bonds to buy bullion, but rather include gold as an essential part of a portfolio. His idea is not always well received by younger portfolio managers who came of age in a gold-free era and do not appreciate the difference between gold and equities. They somehow expect Campbell to come up with the numbers or the CEO of Gold Inc, when of course gold is not like that.
Risk vs reward
Mark Twain once warned that ‘a mine is a hole in the ground owned by liars’. Analysts at the Toronto Stock Exchange clearly had not read Twain when Bre-X floated in 1997. It was a warning of the dot-coms to come – gold at the end of the rainbow. The company jumped temporarily to C$6 bn in valuation before one of its geologists who had seeded gold fields in Indonesia ‘jumped’ from a helicopter, taking the stock price with him.
Calgary-based Bre-X’s stock became worthless after its Indonesian gold deposit was found to be a hoax. Prior to that, Vancouver-based Placer Dome bid C$5 bn for the company and Toronto-based Barrick Gold entered into a partnership with Bre-X. Fidelity owned 7.6 percent and Lehman had a strong buy on this company that had no revenue or profits whatsoever, so ordinary investors need not have felt too foolish when their stock went from C$280 to nothing.
Brenda Radies, head of corporate communications and acting IRO for Placer Dome, admits that Bre-X still lingers in the lore. ‘The fact that gold is going up is helping it wear off,’ she qualifies.
Doing investor relations for a gold corporation is unique in that the company has no control over price, says Radies. ‘Because most investors buy gold stocks as a proxy for gold, most of us are very leveraged to its price. A 1 percent increase in gold is a 3-5 percent increase in share value,’ she explains.
The upside of that equation for IROs is that when the stock prices fall, there are no irate callers because shareholders know it’s the gold price. ‘In normal IR, you push brands and sales, but that’s not true for a gold company,’ says Radies. ‘A company produces gold but there is no brand associated with it; your gold is exactly the same as everyone else’s.’ According to Radies, Placer Dome does not keep an inventory and does not emphasize sales revenue. ‘We record it but no-one pays much attention because you automatically unload everything you produce.’
Gold companies compete for properties to mine more than investors. Their competition for shareholders is limited to a few IR selling points. As Radies summarizes, ‘Good management and reserves – the gold you have in the ground and that you think you can mine in the future.’
Institutional buyers, who own over 60 percent of Placer Dome, are balancing their portfolios with an asset that trades at a premium compared to what gold producers with happy snobbery call base metals.
The balance between supply and demand for gold is hardly refined. Radies points out that mining lead times are some five years from discovery to production and they are capital intensive. ‘If the gold price goes below the cost of production and you mothball a mine, it takes six months to restart.’
This is of course the drawback. Over the last decade gold prices have been helter-skelter. Neville Wells of the WGC dismisses such alarmist talk. ‘There has been a misunderstanding of how gold works. Gold was $800 an ounce for 21 minutes because someone miscalculated,’ says Wells.
Lining pockets
The WGC handles the retail investor relations for gold and its efforts are producing strong results in Germany, where inflation haunts the national subconscious. The WGC took advantage of the country’s anxiety over the impending arrival of the euro with an advertising campaign headlined with the slogan Make a small investment in gold. The effect was immediate and impressive. Retail investment demand for gold doubled with Germans snapping up more than 2 tons in the six weeks from the beginning of November last year.
Retail buyers have choices. You can buy bonds, gold coins or jewelry. You can buy a share in a heap of anonymous gold kept in a vault or you can get your own personalized hoard. One Japanese investor was recently reported to have taken 20 kg of the stuff home to hide under his thin tatami mattress, so he could sleep soundly in the knowledge that no bank would default away his life savings.
As with most true believers, it is difficult for those outside the faith to see what the fuss is about. However, you don’t have to be a gold cultist to realize this stuff is unique. Since it was first mined, more than 140,000 tons have been extracted from the earth, and most of it is still around. Gold does not rust or decay. When the World Trade Center was hit, the structure was pulverized but the Bank of Nova Scotia’s hundreds of million of dollars worth of gold was still waiting in vaults when excavators reached them – surrounded by armed FBI men of course.
Gold resists comparison with other metals. When Ford cornered a billion dollar supply of the much more expensive palladium, it was not because it wanted to admire ingots of the stuff in its vaults; it was because Ford wanted to assure itself of catalytic converters. Then the price of palladium went down by over two thirds.
Ironically, the WGC’s Wells foresees increasing use of gold as a catalytic converter because it’s cheaper than palladium or platinum. ‘Catalysis is now a big issue for gold because it works at lower temperatures as well,’ adds Wells.
But few people are going to stash mufflers in their basements. Most gold is bought and kept for its own intrinsic value. Gold fans always see good times for gold. Although the Central Banks have been somewhat agnostic about gold as money, it does not stop them hoarding the stuff. Between them they sit on 32,000 tons of the stuff and even the depleted Fort Knox has 8,000 tons.
Catalytic effect
Even in investment terms, gold has a catalytic effect. As Richard Scott-Ram, the WGC’s chief portfolio strategist, is happy to point out at investment conferences, ‘Having a stable gold holding allows fund managers to go for higher risks and returns in other parts of the portfolio.’ So while gold itself is not a performing asset, it enables more growth overall for its holders.
According to Scott-Ram, gold does good things for portfolios because it is counter-cyclical and therefore negatively correlates to other asset classes. Over the last few years gold has gone up as stocks have come down. ‘If you have a basket of foreign currencies, gold will stabilize it,’ he says. ‘We are like an insurance policy for life or health – you don’t buy it for investment, you buy it for other reasons.’
With all those piles of gold sitting in the world’s central banks, you may think that gold has limited liquidity and that a relatively small activity in the markets could run the price up or down. One fear investors have is that the banks will sell their reserves. However, as Scott-Ram points out, that would in fact depress the value of their assets. And most Central Banks have agreed that they won’t sell more than 400 tons a year.
For less romantic investors, or maybe for those who do not foresee apocalypse just now, the proxy for the actual metal is gold stocks – shares in the mining companies that between them form the WGC. For protocol reasons, the council itself does not push mining investments and serious gold bugs discount such ersatz investments.
Indeed, as Bre-X showed, there are more substantial reasons to take care than mere prejudice.
