Joseph L. Shaefer

Gold Stocks vs. Gold: Who's Winning?

Thank you. A well-written article and incisive comments from readers.

For me, the investment decision matrix is rather simpler: when investors believes the entire market / economy / nation is in danger, they will flee to the safety of the physical metal. When they believe gold will rise, however, on fears of inflation and a weakening dollar, they will tip toward the producers.

Using this matrix, going forward for the intermediate term I believe the producers will be the better choice.

Gold, Oil and Fixed Income? They're All in This CEF (GGN)

"The proof of the pudding is in the eating."

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!

Gold, Oil and Fixed Income? They're All in This CEF (GGN)

I try to only answer questions in my responses rather than address opinionated diatribe -- but I think too many readers will get the wrong impression from one vitriolic commenter here.

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

Gold, Oil and Fixed Income? They're All in This CEF (GGN)

It's a family publication. I may have cleaned it up just a tad for this venue...
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!