a gold portfolio strategy for comment

Hey all.

I’m a gold bull, and want to go into my current portfolio strategy for critique/comment. Any feedback would be really appreciated.

Contents of this post:

1. Why I’m bullish
2. What my aims are
3. My 2c analysis on the various asset types of gold investment


1. Why I’m a bull:

Physical scarcity, war etc are peripheral issues for me. I’m a bull mostly because I think chances are the USD will soften. There are so many potential hazards there, and such a scarcity of good news that I think that the odds are on the side of a falling greenback. That’s 90% of it.

To further clarify - frankly I have no idea if we’re seeing a secondary correction, an interruption of an ongoing bear or the next great leg up in the POG at the moment as it tests resistance. I don’t think many commentators do either. As far as I know, barring major external events, it could go either way in the near term. I’m bullish on a 12-36 month horizon.

For me there is no point at all being in the market unless it can outperform cash. Gold is one area I see that has a genuine chance of doing so. I’ll remain diversified into other areas, of course, but aim to pull back on some other holdings (like uranium, which I am also bullish on, but in perhaps a longer timeframe than gold) and focus more in here. I have a lot to learn about the nuts and bolts side of mining etc here, but think I have a big picture more or less down.

2. What I aim to hold:

I’m moving more heavily into gold now, and am aiming for the following mix for the gold part of my portfolio –

• Physical bullion 20%
• Major equities 40%
• Junior equities 40%

For me, this is an ideal mix between risk and reward if my assumptions about POG moves prove to be correct. Any thoughts? Do you personally prefer juniors or the larger operators in the current environment? Is this a suboptimal mix for any reason?

3. Asset types and their pros and cons

I’ll go into what I think are the relative merits of these asset types. Please tear into me if I’ve made any false assumptions. Please add any info if you think it will help me or others.

3.1 Physical bullion (aiming at a 20% investment of total gold portfolio):

Cons:

• transaction, holding and insurance costs (minor).
• potential downside if POG softens

Pros:

• Neither moth nor rust doth corrupt it. It’s not in danger of being worthless any time soon.
• I could be off base here, and this is a bit naughty – but it seems to me to be largely an off-the-grid holding? I know Ainslie bullion, apart from needing to ID you on purchase, has no formal reporting requirements to the ATO. I am, of course, a completely honest citizen and would never dream of avoiding tax, but this seems a ‘hidden’ asset if one structures one’s transactions that way (say, for pure speculation’s sake, withdrawing cash regularly in 1k amounts from an ATM and buying bullion). Is that right?

3.2 Major equities (aiming for a 40% investment of total gold portfolio):

Clearly, this means LGL, NCM and to a lesser extent SBM.

Pros:

• Generally well positioned to take advantage of POG strengthening. Cashed up and less vulnerable than juniors.
• Oversold relative to the POG. So may rubber band back when sentiment changes. More chance of rubber banding than the physical (meaning more chance of gain).
• Simply have to have money in here to have any kind of balanced gold play.

Cons:

• Volatile. If POG softens, will see more disproportionate corrections to the downside than with the physical.
• Market isn’t sentimental towards gold at the moment.
• General squeeze on between softening POG and increasing costs. If this continues, the SPs will further suffer. Cost of sales / cash costs / etc quite important here.
• All of these stocks have some individual downside quirks. LGL – overly dependant on the Lihir Island resource, although some good moves into diversification (notably ivory coast) recently. NCM – ongoing failure to meet guidance at Telfer. SBM – schitzo stock that the market hates and some extremely poor moves from management recently (failed offering and Ed’s margin fiasco – large overhang from Macquarie).

I hold NCM (which was very impressive on Monday’s meeting, I thought) and SBM (because I want to be around if Gwalia comes good and it seems to be steadyish now).

Any comments on those thoughts? I prefer NCM to LGL, but maybe there’s something I’m missing there? Would love to have that pointed out if so.

Finally,

3.3 Gold Juniors (aiming for a 40% investment of total gold portfolio):

Pros:

• Greatest capacity to move.
• Some lovely little outfits around at the moment.

Cons:

• High risk / speculative. If market moves against me, here’s where I may see holdings wiped entirely. Careful stops and monitoring called for. Also, patience.
• Capital raising for capex/opex needs may well be an issue in the current market, so preference here would be to companies who are reasonably cashed up, with proven (JORC) resources, and preferably producing or on the cusp. I'd prefer juniors who are already or soon to be capable of self-funding through sales.

At the moment, the only junior I hold is MCO. Excellent resource and highly impressive management. Cash flow may be an issue. I have a great feeling about this one, though. Plus the HC forum crew there are lovely.

Any tips on ‘must be in’ juniors would be welcome as I’d like to hold small parcels in maybe two or three more – aiming for less investment over more companies here.

So that’s me. What am I missing? Where am I being stupid? Are there strategies or asset types I should be considering here that I've missed, and what do you think of my mix?

Hopefully this post might be of interest or use to others - like those investing in gold for the first time. Any discussion around any issue raised from reading this would be very valuable to me. Thanks!