Gold as insurance

Nick Barisheff is not your typical gold bug. You won’t hear any extravagant promises of $1,000 bullion from him, despite the recent run-up in the price. Instead, the silver-haired and moustachioed president of the Millennium Bullion Fund prefers to talk about gold in the old-fashioned way — as an insurance policy against inflation and/or a meltdown in the financial markets.

Not that he doesn’t believe that bullion will continue to rise in price. He points to a world-wide dwindling of supply, evidenced by the closure of uneconomic South African mines, as verification of that view. As well, precious metals have important industrial uses, particularly platinum which is a critical component in such things as catalytic converters and high-tech equipment. Reduced supply will inevitably lead to higher prices.

But that’s not the message he seeks to convey. Rather, he is on a personal quest to educate more investors to diversify their portfolios and reduce their risk by adding a precious metals mutual fund to the mix.

Not just any precious metals fund, he hastens to add. Most of them don’t qualify, at least by his standards, because they invest primarily in shares of ming companies. He regards that as an entirely separate asset class, with different dynamics, than simply buying and holding bars of metal.

That’s why you won’t find his fund listed in the Precious Metals category when you go to Globefund or Morningstar. Instead, it’s slotted in with a pot-pourri of other off-beat funds in the catch-all Speciality/Miscellaneous category.

Off-beat is a good way to describe this fund and the way Barisheff runs it. The portfolio consists solely of three asset classes: gold, silver, and platinum, each representing one-third of the holdings in dollar-value terms. The metals are all held in bar form (not certificates) and stored in the vaults of the Bank of Nova Scotia.

Barisheff does no trading — this is a buy-and-hold portfolio in the most basic sense of the term. Nor does he speculate on the future price direction of any of the metals. Whenever new money is invested, it is always in the same one-third proportions.

So far, a Canadian who invested in this fund at the outset (March 2002) has just about broken even. However, if Americans were able to invest, they would have done very well. That’s because the U.S. dollar value of the metal in Scotiabank’s vaults soared in when the greenback went into a sharp dive (gold traditionally rises when the U.S. dollar declines). However, in Canadian dollar terms the value of gold has stayed relatively flat.

But short-term results aren’t important to Barisheff. He commissioned a study by Ibbotson Associates, a well-known Chicago research firm, which shows precious metals have a very low correlation with financial markets over the longer haul. That means they offer a refuge when times are bad. Interestingly, the study concludes that the performance of an equally-weighted gold/silver/platinum portfolio was actually closer to fixed-income assets than to equities over the period from 1972 to 2004.

The report suggests that adding precious metals to a portfolio of U.S. equities, bonds, and Treasury bills (all the findings were based on American markets) would modestly improve long-term returns without adding risk to a portfolio. For example, an asset allocation of 7.1 per cent to metals would increase the expected return on a conservative portfolio from 6 per cent to 6.2 per cent. A 12.5 per cent allocation in a moderate portfolio would add 0.4 per cent to the expected return. But keep in mind that this is in U.S. dollar terms.

One of the main values of a precious metals component, says Barisheff, is as an insurance policy. Gold and the other metals are particularly good hedges against inflation which, he contends, is increasing at a much more rapid rate in North America than official statistics suggest. He points to the fact that energy and food are excluded from the core inflation rate while such factors as the cost of used cars influence the CPI. Plus there is the inescapable fact that in times of great crisis, gold has historically always been the value store of last resort.

If you believe Barisheff has a valid case, the Millennium Bullion Fund requires a minimum initial investment of $2,500 and is sold on a front-end load basis, with a maximum commission of 5 per cent. The MER is a high 3.46 per cent, which seems a lot for a fund that does no active trading. However, holding bars of bullion entails storage and insurance expenses, which add up when tacked onto a 2.25 per cent management fee. Units are available in both Canadian and U.S. dollars. The fund is sold through financial advisors.