Torn Buttons and Restful Nights

Some things just don’t go together…like Bermuda shorts
and knee socks…or cinnamon and tarragon…or Gregorian
chants and Gangsta rap…or Bill and Hillary. Likewise,
high volatility and restful nights just don’t go together.

We like restful nights, which is why we are intrigued by
BlackRock Global Energy and Resources Fund (NYSE: BGR).

A little bit of volatility is tolerable, perhaps even
exhilarating…but a little bit goes a long way. As we
noted last week, we do not object to the sort of volatility
that might rip open a dress shirt without bothering to undo
each and every button. But we DO object to nearly every
other form of volatility.

Therefore, we are forever in the pursuit of investment
ideas that hold out the possibility of producing a positive
return, but do not subject investors to harrowing ups and
downs. We rarely find them, but we always search.

A successful stockbroker who shares our affinity for low
volatility – and who is also very accomplished at producing
superior returns for his clients – mentioned an intriguing
security to your New York editor last weekend.

"Hey Eric," the broker began, "I read your latest Rude
Awakening about trying to own resource stocks, while also
trying to dampen volatility, and I thought of an idea for
you."

"What’s that?" came the reply.

"BlackRock Global Energy and Resources closed-end fund
(NYSE: BGR). I’ve been buying it for my clients over the
last few months."

"Sounds interesting, what’s the angle?"

"Well it’s a fund with a very heavy weighting in high-
yielding resource stocks. So the idea is that it pays a
nice current dividend, while also providing plenty of
upside to the resource bull market. But I gotta tell ya,
the nicest thing about this stock so far is that its
volatility has been very low…So most of my clients love
this thing."

"I think I’d love it too."

"Maybe the stock will become more volatile in the future,"
the stock-broker friend continued, "but it has been
behaving admirably so far. Last spring, for example, when
all the energy stocks were melting down, BGR held its value
relatively well…You might want to check it out."

"Sounds good," we replied…And so we checked it out. The
more we investigated BGR, the more we liked it.

For starters, this seven-month-old closed-end fund trades
for a 10% discount to net asset value (NAV). In other
words, every 90 cents spent to purchase the stock controls
one dollar worth of assets. Although a 10% discount to NAV
occurs frequently in the closed-end fund world, we always
appreciate availing ourselves out of this "free" leverage.

More importantly, BGR pursues a very different strategy
than most resource mutual funds.  It emphasizes high-
yielding stocks. None of its top five holdings, for
example, appear in the Goldman Sachs Global Natural
Resources Index. The Goldman Index, which trades as an
exchange-traded-fund under the symbol "IGE," holds stocks
like British Petroleum and ExxonMobil as its largest
positions. Not so for BGR.

It holds lesser-known securities like Enterprise Products
Partners and Teppco Partners among its top five holdings.

The fund’s marketing materials provide no clue whatsoever
about its unique investment approach. "Under normal
conditions," the fund’s disclosure materials blandly
explain, "the trust will invest at least 80% of its total
assets in the equity securities of energy and natural
resources companies…Companies in the energy and natural
resources industry include those companies involved in the
expiration, production or distribution of energy or natural
resources, such as gas, oil, metals and minerals as well as
related transportation companies and equipment
manufacturers."

A quick peek at the portfolio, however, reveals that the
fund gains exposure to the resource sector in very creative
ways. It emphasizes high-yielding stocks like "master
limited partnerships" and "investment trusts." Both of
these structures convert operating assets like pipelines or
coal terminals of oil fields into utility-like vehicles
that pay high dividends.

BGR’s largest position, Magellan Midstream Partners, L.P.,
operates pipelines and marine terminal facilities that
transport and distribute refined petroleum products and
ammonia. The stock yields a hefty 5.7%. The fund’s third
largest position, Teppco Partners, L.P., operates pipelines
to transport crude oil, refined products and liquefied
petroleum gases. The stock yields 6.3%.

BGR’s top five holdings, all of which are limited
partnerships, pay an average dividend of 5.8%. Thanks to
BGR’s heavy weighting in these high-yield resource stocks,
the fund pays an annual dividend of 6%.

However, despite the fund’s many utility-like holdings, it
is hardly a stodgy performer. Since May 16, when the most
recent rally in resource stocks kicked off, BGR has
delivered a total return of 18%, compared to 23% for IGE –
a smaller return to be sure, but achieved with much lower
volatility. And that’s a good thing.

We prefer low volatility – both in romance and in finance –
which is why BlackRock Global Energy and Resources Fund has
caught our eye.

Oil is expensive…Gold is cheap. Today, an ounce of gold
buys only seven barrels of oil. Every time, the price of
gold has dropped below 10 barrels of oil, it has paid to
buy gold. Perhaps we should be buying the shiny stuff
again…

Gold, oil, housing and even corporate profits have seen
massive increases over the last few years… when priced in
dollars. But when priced in oil, if we may imagine that,
most assets have FALLEN in price. In other words, gold is
lagging behind the real-world cost of living.

Gold bugs often remind us that the basic commodities of
life, priced in terms of gold, have remained the same for
thousands of years. An ounce of gold would buy roughly the
same number of bread loafs today as the day Caligula and
his last concubine sighed deeply together.

But in 2005, gold doesn’t buy as many loaves of bread…or
barrels of oil…as it usually does. Gold is too darn
cheap, both in terms of oil and in terms of history.

The gold-centric monetary era ended on August 15th, 1971
when then-President Nixon "closed the gold window" to
abolish the exchange rate mechanism known as Bretton Woods.
On that same day, the Great Dollar Standard Era began. The
U.S. dollar, though it would no longer be backed by gold,
would pretend to be as good as gold. This faith-based
system has not failed completely, but neither has it
succeeded completely.

As Richard Duncan points out in his superb book, The Dollar
Crisis, in the 27 years between 1944 and 1971 that the
Bretton Woods regime lasted, foreign central bank holdings
of US dollars increased 55%. But during the 30 some odd
years since Bretton Woods fell apart, those foreign reserve
holdings of US dollars have increased over 2000%.

Evidently, dollar bills are much easier to reproduce than
ounces of gold.

Last Friday, we found ourselves speaking at, of all things,
a conference on Internet marketing. We were slated to
follow Porter Stansberry, founder of Stansberry &
Associates. During his speech Porter relayed a curious
feature of the Dollar Standard era.

Since the beginning of the Dollar Standard era, every time
an ounce of gold could buy less than 10 barrels of oil, an
investor would do well to buy gold. Today, an ounce of gold
buys only seven barrels of oil. The message from the
markets it clear: Buy gold.