Gold, Oil and Fixed Income? They're All in This CEF (GGN) 13 comments
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We “sold too early” at the end of April, between 8,200 and 8,500 on the Dow. We expected considerable churning but little upside. We found plenty of fine short-sell candidates during the time since, but few stocks we were willing to buy. Well, here we are, at the high end of our exit range with our short positions laid on, and finally – a worthwhile long position for the troubled times we see for the Dog Days of Summer.
That position is the closed-end Gabelli Global Gold, Natural Resources & Income Trust (GGN).
We have long recommended, at the appropriate entry points in the endless profit machine called the energy cycle, the ADRs of Petroleos Brasileiro SA (PBR), Imperial Oil (IMO -- really a better play on natural gas,) Devon Energy (DVN), and Murphy Oil (MUR.) Those, coincidentally, are the largest energy holdings of GGN, along with lesser positions in other old favorites of ours like Chesapeake Energy (CHK), Conoco Phillips (COP), Marathon (MRO), Transocean (RIG) and a whole bunch more. As of the end of March, the fund's most recent quarterly holdings report, those energy and energy service firms comprised 24% of GGN’s portfolio.
Comprising 52% of the remainder are some of our favorites in the metals and mining business. GGN’s largest holdings include Agnico-Eagle (AEM), AngloGold Ashanti (AU), Barrick (ABX), Gold Fields (GFI), Goldcorp (GG), Harmony Gold (HMY), Kinross (KGC), Lihir (LGL), Newmont (NEM), and Yamana (AUY) – as well as lots of others familiar to regular readers.
Add about 10% in T-Bills, 10% in corporate bonds in mining and energy firms, and a smattering of convertibles, and that brings us to nearly 100% of their holdings. But none of that accounts for their outsize dividend payout of 11.92%. That monthly dividend comes from writing calls against many of their positions.
Now if you are an unabashed bull on gold and energy and believe both will move in concert to the upside with nary a pause for breath, you will not want to buy GGN. Many of their written calls will be exercised and the stocks called away before they could participate in such a stampede.
If, on the other hand, you have studied these cycles as I have, not from history books, but firsthand, with my own skin in the game, you may believe, as I do, that nothing moves straight up or straight down and taking a little here and a little there adds up to a lot more than the occasional big score punctuated by many losses. As you can see in my comments on energy here, I think oil stocks are fully priced right now and due for a breather.
I am reminded of the story you may have heard of the old bull and the young bull walking in the south 40 and sighting a herd of cows grazing in the valley below. “Let’s run on down there and pick one out!” says the young bull. “Son,” says the old bull, “let’s walk on down there and pick them all.”
That is the hallmark of our investing style and accounts for what success we have enjoyed over the years. I responded to a commenter in a previous article who chided me for going short, noting the old saw that a short position could run against me to infinity but the most I could ever hope to make is 100%. I replied that I’m OK only making 100%. I took some “thumbs down” ratings for that response but it remains a most appropriate and honest reply. (And stop orders are as easy to place as sell orders, so the infinity argument is a straw man...)
I’m OK making only 100% -- and I’m OK making only the 12% yield from GGN for some extended period, comfortable that gold and energy are two sectors I may not see skyrocketing overnight, and maybe not in tandem, but believing strongly that these two sectors will always outpace the rate of inflation over time no matter the backing and filling along the way.
The caveat I would offer with GGN is that I prefer to buy my closed-end funds at a discount to NAV and GGN sells today for a 6.2% premium. That’s as low as the premium has been in 9 months, but there is no guarantee that it will not return to a discount at some point in the future (in which case we will likely buy more.)
Full Disclosure: We and many of our clients are long GGN.
The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following:. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.
Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless – especially so you are not over-impressed by the fact that our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running. What if this is the year we under-perform it?
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.
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This article has 13 comments:
GGN sounds like a fine addition to most portfolios in this kind of market. I don't believe the current market rally will be sustained. It's seen a strong rebound from an oversold state, but the rise has been on low and declining volumes, and is spurred on by earnings so weak that they only look ok against "beating" low-ball estimates. Also, like many SA followers, I have serious doubts about the US economy's rebound, despite bull claims that it's just around the corner. We have worked only part way through the 4-5 years of "false growth" excesses; the economy will likely revert to the mean before resuming steady growth at an historical normal rate. Even with government stimulus 2010 looks very weak.
GNN looks promising given its two-sector focus. Increasing demand for a declining energy resources should result in a general upward trend in prices, eventually driving E&P. I've never been a fan of gold investing, but given the extraordinary federal stimulus, inflation should emerge. These are both long term trends, IMO. The large options-funded yield is attractive even if the share price treads water.
Discl.: This afternoon I placed an order for a small opening position, and will "walk" toward a full position if energy shares fall significantly or if the premium narrows.
--R
Grins, JS
On Jun 18 09:17 PM Gruber wrote:
> I've heard the "bull story" in a different context. Thank you for
> the sanitized version, but the original version's a hoot!
I'm long GGN.
re: ...they're just returning your own money...
Actually, with my 12% divy reinvested, they are returning my money and then some.
On Jun 19 06:42 PM YoYoMama wrote:
> rrtzmd...
>
> re: ...they're just returning your own money...
>
> Actually, with my 12% divy reinvested, they are returning my money
> and then some.
There’s nothing wrong being ignorant as long as it is your intent to educate yourself. I knew nothing about this business when I entered it 38 years ago, either. But on the path to becoming a Registered Principal, Options Principal, Municipal Securities Principal, Financial and Operations Principal, etc., I did my best to educate myself rather than {{ remain }} ignorant.
A commenter here with an excess of opinion (as well as a bad hair day, sniping at a more civil commenter “...that has to be one of the dumber statements I've read...“) has led some readers down the path of believing that “return of capital” means GGN is returning your money to you as additional stock rather than actually earning anything on it. A cursory review of the US Tax Code would have educated the commenter about this mis-staement.
“Return of capital” has a very different meaning when dealing with oil and gas firms and mining companies than it does in Accounting 101.
Accounting 101 teaches that return of capital refers to payments back to "capital owners" (like shareholders) that exceed the net income of a business. In this application, return of capital would effectively shrink a company’s equity, since it would transfer value from the company to the shareholder.
However, in the Real World beyond Accounting 101, lobbyists for extractive industries like mining and energy – which is all GGN owns except for its bonds –convinced Congress that, since these were wasting assets, at least some of the real dividends these companies pay – from their cash flow selling their product, not as a return of your investment -- should be treated differently from a tax standpoint since the actual dividend stream you receive is really not as valuable as a perpetual cash stream might be since, sooner or later, the oil field or the gold vein will run out.
Much REIT income is similarly treated as a “return of capital” – just as the oil and mining companies get a “depletion allowance,” real estate companies get a “depreciation allowance.” Same logic.
Now. Knowing that, where did I say in the article that their dividend was return of capital? I didn’t. That was stated by the same commenter. But 30 seconds of research to view GGN’s 2008 allocation (readily available online) of net investment income, short-term capital gains, long-term capital gains and {{ “non-taxable }} return of capital,” would show that the ordinary income, reported on every shareholder’s 1099-DIV, was about 11% of the dividend stream (40% of that was only taxable at the 15% rate,) 25% was long-term capital gains (taxable at just 15%) and 64% was a tax-free {{ return of capital }} thanks to the depletion allowance.
The only reason I didn’t point out that this 11%+ return was actually sweeter because of the tax treatment is that I thought too many readers would know this about the extractive industries and be bored. In fact, “return of capital,” as a tax term, means you actually keep much more of GGN’s cash dividends after taxes than you would from a non-return of capital investment.
The only downside I know of with return of capital is that you account for it by reducing your cost basis which, assuming you hold GGN a year or more, means you will pay 15% capital gains tax on that money at some time in the future. Of course, that beats ordinary dividend income rates any day.
As for the commenter’s trumpeting in caps that GGN’s “one-year return is MINUS 51%” (before accounting for the dividend, I might add,) I say that is completely irrelevant, because…
…I didn’t {{ recommend }} it at it’s all-time high of $30 and would not have recommended it at $30!! I recommend it at $14, at which price I am buying a portfolio of oil and natural gas stocks, gold mining stocks, and someone’s time to seek the best premiums in order to maximize my cash flow, at half the price the commenter was upset about. Success in this business depends not solely on what you buy, but when you buy it (and a host of other factors, as well!)
Regardless of the opinions of some, it will continue to be our policy to buy quality holdings, preferably paying a fair and sustainable dividend, when they are low, and sell them when they are high…
Good investing to all,
JS
seekingalpha.com/artic...
...no doubt because of that rich dividend -- tax advantaged, no less!!!...but, uh-oh, so much for that dividend:
biz.yahoo.com/iw/09020...
...and poor old PDS is now trading around $5...but not to worry, after all, he is a "Registered Principal, Options Principal, Municipal Securities Principal, Financial and Operations Principal, etc."...and don't you know, I bet he saw that dividend cut coming and knew exactly when to sell PDS -- don't you think?...as regards GGN and its "return of capital":
"If the Fund does not generate earnings from dividends and interest received and net realized capital gains equal to or in excess of the aggregate distributions paid by the Fund in a given year, then the amount distributed in excess of the Fund’s investment income and net realized capital gains would be deemed a non-taxable return of capital. Since this would be considered a return of a portion of a shareholder’s original investment, it is not taxable and is treated as a reduction in the shareholder’s cost basis."
...in other words, if they don't earn enough to cover the dividend then they just give you back your money...last year about 65% of the dividend was "return of capital":
www.gabelli.com/Templa...
....sure, it's tax free...it's coming out of the "net asset value" -- YOUR net asset value...that's why it reduces the basis -- it's just YOUR money being returned to you...but it's actually WORSE -- it's your money being returned AFTER the preferred shareholders collect THEIR interest on the 100 MILLION bucks they loaned the fund...that hundred million represents a THIRD of the assets...almost 80% of the funds assets are in common stocks of oil and metal companies -- hardly a rich dividend stream...so a shareholder better hope Gabelli's boys really know how to trade stocks and options because if at some point that assets/liabilities ratio gets too low then whose dividend do you think will get cut -- the common or the preferred?...wonder what would happen to the stock then...might be wise to ask some PDS holders how they feel...I'm sure they're just thrilled by all those tax advantages...
We eat our own cooking.
It’s worked so far – since beginning our Investor’s Edge ® Growth and Value Portfolio (31 Dec 1998,) into which we are placing GGN, we have never had a down year. During that 10 ½ years, the S&P 500 is down 25.2% (through the last trading day of the last full month – 29 May 2009.) During the same period, the IE G&V Portfolio is up 246.7%.
We do not expect every individual security we recommend to excel – we only demand that the portfolio excel and that we recognize those securities that are not doing well and swiftly rebalance. Perhaps GGN will be one of those we will do well on, perhaps it will not. No one enters a marriage planning their divorce.
We publish our track record every month for thousands to see. We believe in full transparency, doing solid research, and rebalancing as the times dictate. Which as why all readers know that we are now in income, gold, inverse ETFs and cash equivalents. Not PDS or some other since-sold recommendation dredged from the days of the bull rally of early 2008…
Enough of this nattering. I won’t comment further, but will let the recommendation speak for itself win, lose or draw.
If you don’t like it, don’t buy it!
www.stanfordwealth.com...
...on the other hand, it's simple enough to start a portfolio here:
simulator.investopedia...
...they'll record every transaction along with costs and adjustments for splits, dividends, etc...that way everyone'll be able to see your performance in the REAL world...by the way, you need someone to produce a new website; the current one looks like something from about 1985...