PMNXF - ASA: This Gold Fund Can Maintain The Purchasing Power Of Your Wealth

2023-04-21 14:06:11 ET

Summary

• The steep inflation that we have seen in the USA over the past eighteen months has made it critical to preserve your wealth.
• ASA Gold and Precious Metals Limited invests in a portfolio of gold miners, which historically should work pretty well to ensure that your purchasing power increases over time.
• The fund enjoys incredible international diversification, which could prove quite helpful for most American investors.
• The fund's distribution leaves a lot to be desired and it fails miserably as an income fund, but that is also not the point of it.
• The ASA Gold and Precious Metals Limited fund is trading for an incredibly attractive valuation today.

It is unlikely to come as a surprise to anyone reading this that one of the big problems facing everyone in the United States is the incredibly high rate of inflation that has been dominant in the economy. This is evidenced by the consumer price index, which has risen at least 6% year-over-year in eleven of the past twelve months:

While we have been seeing the rate decline in recent months, this was mostly due to falling energy prices. In a recent blog post , I discussed how this trend could reverse as we enter the summer months and undo much of the progress that has so far been made on inflation. Indeed, the federal funds rate is still far below the rate that the Taylor rule states is necessary to bring inflation under control, although it will be pretty close if the Federal Reserve hikes the rate again in May. Thus, we may not see inflation fall to a manageable level anytime soon. In fact, BlackRock’s Larry Fink states that high inflation will likely be with us for quite some time, and he is hardly alone in this projection. Naturally, the longer this situation persists, the worse it will be for consumers, savers, and retirees.

As such, it could be important to have some investments in your portfolio that will maintain their purchasing power in the face of the highest inflation that we have seen in nearly four decades. The classic solution to this is gold, and indeed gold has done reasonably well this year:

Gold coins and bars are not always the best way to invest in gold though, as they produce no income. Rather, potential investors looking to use gold to preserve their purchasing power can invest in mining companies instead. After all, a gold mining company should see its cash flow and profits increase when gold prices do. It can be difficult to choose which particular company to purchase though, so one way in which investors can add gold to their portfolios is by purchasing shares of a closed-end fund, or CEF, that specializes in gold. These funds are nice because they provide an easy way to obtain a professionally managed portfolio that can usually deliver a higher yield than any of the underlying assets.

In this article, we will discuss ASA Gold and Precious Metals Limited ( ASA ), which is a closed-end fund that specializes in the sector. This is admittedly a somewhat unusual fund, as I discussed in my last article on it, but this does not mean that it has nothing to offer an astute investor. Unfortunately, the fund only yields 0.12% at the current price, so it is not a particularly good option for investors seeking income. Rather, the fund is mostly intended for those that wish to preserve the purchasing power that they already have. Let us investigate and see if this fund could be a good addition to your portfolio.

About The Fund

According to the fund’s webpage, ASA Gold & Precious Metals Limited has the primary objective of generating long-term capital appreciation. This makes a certain amount of sense considering that the low yield does not allow this fund to perform particularly well as an income vehicle. In fact, this is one of the only closed-end funds that does not work very well as an income investment. As might be expected from this objective, the fund invests primarily in common stock. As of the time of writing, its portfolio consists entirely of common stock, although it does have a small amount of cash on hand and an even smaller allocation to preferred stock:

Thus, this should be thought of as an equity fund. Common stock delivers its investment returns both via direct payments to the investors in the form of dividends and through capital gains as the issuing company grows and prospers. This fund is primarily targeting the latter, so investors in the fund should expect their returns to be realized through the appreciation of the fund’s shares, not via the distributions.

In terms of share price appreciation, this fund has certainly not done that bad as it is up 56.65% over the past five years:

This is actually pretty similar to the performance of gold itself over the same period. The SPDR® Gold Shares ETF ( GLD ), which claims to track the price of gold, is up 46.96% over the same period. Meanwhile, the GAMCO Global Gold, Natural Resources & Income Trust ( GGN ), which is another gold-focused closed-end fund that is popular among investors, has lost 25.35% over the period:

As mentioned in the introduction, we would expect a portfolio of gold mining companies to beat the price of gold, as we clearly see here. This is because they produce gold at a profit, so they benefit from rising gold prices (as they can sell their products for more money) as well as the growth that the profits enable. The big problem with the GAMCO fund is that it tends to distribute far more than it actually earns, which I have discussed in various previous articles. Overall, it appears that ASA Gold & Precious Metals Limited is a good way to utilize gold as a way to protect your purchasing power and earn a profit from mining operations at the same time.

As I mentioned in my last article, ASA Gold & Precious Metals Limited differs somewhat from other gold mining funds in that it includes a number of small operators as opposed to just focusing on the major companies in the industry. We can see this by looking at the fund’s largest positions:

This fund differs from most other funds in that it provides a full list of its holdings in the fact sheet . The largest companies in this fund are:

We see a mixture here of both senior and junior miners, with a notable preference for juniors. This is rather nice to see because senior miners tend to be much more stable entities than juniors, but juniors have much higher potential rewards. The mixture here should give investors the best of both worlds, which is always appreciated. It should also reduce the somewhat high-risk, high-reward problem that I discussed in my last article on this fund.

One thing that many readers will likely notice is that a significant percentage of the fund’s holdings are not American companies. That is not particularly unusual since Canada, Australia, and the United Kingdom are home to many of the largest mining companies in the world. There are several reasons for this, including the mineral wealth of those nations and the global presence of the British Empire prior to World War II. The tax laws of many of those nations are also somewhat more attractive than those of the United States. The fund actually states that most of the companies in the portfolio are Canadian companies, with the United States accounting for precisely none of the portfolio:

This is something that is fairly unique among global funds. As I have pointed out in numerous previous articles, most funds that invest their assets globally have somewhere around two-thirds of their assets invested in American companies. That results in American investors frequently having outsized exposure to their own country.

The advantage of having international exposure in your portfolio is the protection that it provides against regime risk. Regime risk is the risk that some government or other authority imposes some law or takes some action that has an adverse impact on a company in which a person is invested. It can also refer to events such as the protests that are crippling the city of Paris, France. The only real way to protect ourselves against such an event is to ensure that only a small percentage of our portfolios is exposed to any given country. Clearly, this fund is doing a pretty effective job of accomplishing that and its lack of exposure to the United States could help Americans reduce their overall exposure to that nation.

Making The Case For Gold

As mentioned in the introduction to this article, the incredibly high rate of inflation that has been dominating the United States is greatly reducing the purchasing power of the money that we already have. Gold can help prevent this problem and ensures that your money retains its value in the form of goods and services that it can purchase. In order to understand why that would be the case, it is important to understand the root causes of inflation.

Economists generally describe inflation as being a natural phenomenon, but that is not entirely correct. Inflation is actually caused by a nation’s supply of money growing more rapidly than the gross domestic product. This has certainly been the case over the past ten years. We can see this by looking at the M2 money supply, which is all the cash that people have available in cash, checking accounts, savings accounts, money market accounts, or anything else that could be quickly spent today. Basically, if everyone tried to spend as much money as they could all at once, M2 is the amount that they would have to do it. As of February 2023 (the most recent date for which data is available), this figure stood at $21.0625 trillion, which is a substantial increase from the $10.5013 trillion money supply that existed back in February 2013:

This works out to a 100.57% increase over the ten-year period. That is substantially more than the growth of the nation’s production of goods and services over the period. We measure this economic production using gross domestic product. This figure currently stands at $26.137992 trillion compared to $16.420386 trillion ten years ago:

That is only a 59.18% increase over the period. Thus, we can see that the money supply has overall grown much faster than the actual production of goods and services in the economy. This leads to inflation because this situation results in more units of fiat currency being available to purchase every unit of economic output. As such, the buyers of that output push up prices throughout the economy.

As some eagle-eyed readers might point out, we have seen the money supply decline over the past few months. That somewhat goes against our thesis to purchase gold today as it should result in there being fewer units of currency available to purchase each unit of economic output, and thus deflation. While that is correct, there are two problems with this conclusion. The first is that, historically, every time the money supply has decreased, a recession followed . Government spending tends to increase during a recession because of higher spending on things such as unemployment benefits, welfare, and other safety net programs. In addition, we normally see the government engage in various forms of stimulus to get the economy rolling. That results in rising government debt, particularly since tax revenue declines during a recession. For most of the past few years, the Federal Reserve has been printing money to finance government spending, as I discussed in a previous article . It is likely that the Federal Reserve will have to do the same thing again considering that foreigners are becoming increasingly less likely to finance and support the United States’ profligacy. That would increase the money supply. When we combine this with the fact that rising energy prices into the summer could start pushing inflation higher, it makes a great deal of sense to have exposure to gold prices. ASA Gold & Precious Metals Limited seems like a very good way to obtain that exposure.

Distribution Analysis

One of the biggest reasons why investors purchase shares of closed-end funds like ASA Gold & Precious Metals Limited is the very high distributions that these entities pay out. This comes from the fact that most of these funds try to maintain a relatively flat share price and pay out all of their income and capital gains to their investors. This one is a bit different though as it only pays out a nominal distribution of $0.01 per share quarterly ($0.04 per share annually), but it does sometimes change the amount that it pays out or makes a special capital gains distribution during certain years. This has resulted in a great deal of variation with respect to the distribution over time:

This makes this fund highly unlikely to appeal to anyone that is looking for a regular and consistent source of income with which to pay their bills. However, the fund itself is not really intended for that purpose. Rather, as we saw before, it does serve reasonably well as a way to track the price of gold, while also being able to take advantage of the profits produced by various gold miners. As such, this is more of an inflation hedge and wealth preservation play than anything else. We do still want to investigate the fund’s finances though since it would not serve us well to be invested in a fund that is losing money over time.

Fortunately, we do have a somewhat recent document that we can consult for the purposes of our analysis. The fund’s most recent financial report corresponds to the full-year period that ended on November 30, 2022. While this may not include information from the past few months, it is still as current as the information that we have from most other funds. This report should work just fine for our analysis. During the full-year period, ASA Gold & Precious Metals Limited received $2,550,038 in dividends and surprisingly no interest from the investments in its portfolio. That, naturally, gave the fund $2,550,038 in total investment income. It paid its expenses out of that amount, which left it with a negative $1,404,855 available for investors. That is certainly concerning at first glance as the fund not only could not afford to pay any distributions, but it also did not even earn enough to cover its own expenses.

However, the fund does have other methods through which it can obtain the money that it needs to cover its distribution and provide a return to the shareholders. After all, the fund specifically states that it targets long-term capital gains as its primary objective. It was fairly successful at this over the course of the year as the fund reported net realized gains of $26,768,879 over the course of the year. That was offset by $181,304,052 net unrealized losses, which is quite unfortunate as this completely ruined an otherwise successful year. The fund’s total distributions were $385,798 so clearly it was able to cover both the net investment loss and the distribution out of capital gains with a great deal of money left over, but the net unrealized loss overshadowed that and caused the fund’s assets under management to decline. Overall, the fund’s assets declined by $156,325,826 over the course of the year after accounting for all inflows and outflows. This completely offset the $17,962,132 asset base increase that the fund had over the two-year period, so overall its assets declined over the two-year period. This is certainly disappointing as it goes against our wealth preservation thesis, but gold has been a solid asset to hold long-term, even if it is not always perfect in any individual year.

Valuation

It is always critical that we do not overpay for any asset in our portfolios. This is because overpaying for any asset is a surefire way to earn a suboptimal return on that asset. In the case of a closed-end fund like ASA Gold & Precious Metals Limited, the usual way to value it is by looking at the fund’s net asset value. The net asset value of a fund is the total current market value of all the fund’s assets minus any outstanding debt. This is therefore the amount that the shareholders would receive if the fund were immediately shut down and liquidated.

Ideally, we want to purchase shares of a fund when we can acquire them at a price that is less than the net asset value. This is because such a scenario implies that we are buying the fund’s assets for less than they are actually worth. This is, fortunately, the case with this fund today. As of April 20, 2023 (the most recent date for which data is currently available), ASA Gold & Precious Metals Limited has a net asset value of $19.74 per share, but the shares are currently trading for $16.73 each. This gives the fund’s shares a discount of 15.25% to the net asset value. This is a very reasonable discount that is quite a bit better than the 14.28% discount that the shares have averaged over the past month. Overall, the price looks very reasonable here.

Conclusion

In conclusion, investors have been losing a great deal of purchasing power over the past year due to the incredibly high rate of inflation that is dominating the United States. While there are some signs that this inflation may be cooling off, there are other signs that the positive trends may reverse in the near future or that high inflation will be with us for a long time to come.

The ASA Gold and Precious Metals Limited CEF can help you protect the purchasing power of your wealth in such an environment and the fund is historically one of the best-performing gold closed-end funds. The ASA Gold and Precious Metals Limited fund’s distribution, unfortunately, leaves a lot to be desired, but its attractive valuation and internationally diversified portfolio still make it worth considering today.

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