iBankCoin
Tokyo based, expat Cape Bretoner. Learning to live in a de-leveraging world. Better suited to the crusades. CFA & FRM charter holder. Disclaimer: @Firehorsecaper reminds investors to always due their own due diligence on any investment, and to consult their own financial adviser or representative when warranted. Any material provided is intended as general information only, and should not be considered or relied upon as a formal investment recommendation.
Joined Jun 23, 2015
80 Blog Posts

GOLD: GET SOME

Few topics elicit more controversy that the merit of gold/precious metals in ones investment mix. In a measured fashion (i.e. 3-5% portfolio weighting), I think there is a place for it. GLD was up almost 3% the week of January 4th, in year of our Lord 2016, the worst starting week in global financial markets on record, ever.

The risk diversification merit of gold is sometimes overlooked as the “gold bugs” can be quite overbearing in their views (as in butterfly net crazy), causing people to dismiss the asset class outright. In sizing what is a reasonable allocation, a good starting point is the estimated value of all gold above ground which is $7 tln (171,300 tonnes, a 68 ft. cube for those visually inclined) divided by global household net worth of $250 tln gets you to a 2.8% weighting. Annual production is a scant 2860 tonnes (1.7% of the gold market) versus 20% under “official control”, making the actions of the worlds central banks more important, on balance, that mine supply. The largest central bank gold holdings at present are the US (8133 ¬†tonnes, 73% of their fx reserves), Germany (68%), IMF, Italy (66%), France (66%), China (2%) and Russia (14%). India is the 11th largest holder ¬†(6%). China’s, in particular, has been adding voraciously but gold still makes up < 2% of their foreign currency reserves, versus a global average of 10%.

Gold is very topical is Asia and it is highly prized as a store of wealth. Of global demand, China accounts for 29%, India is 25% and the USA is 5%. Almost all excess refining capacity for the last several years has been expended converting “good delivery” LBMA 400 troy ounce (12.4kg.) bars to the 1kg format preferred in Asia. China is also the largest gold producer at 450 metric tonnes (16% of global production).

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Ray Dalio agrees, in moderation, and his $189bln Bridgewater fund owns Barrick (ABX), GoldGorp (GG) and Silver Wheaton (SLW). As as aside, the combined market cap of these three is approximately the same as Tesla (TSLA).

GDX, Market Vectors Gold Miners ETF is a good option to garner exposure to gold mining equities (mid and large cap) which offers a levered play on the price of bullion. GDX has a 17.5% weighting in Dalio’s three favoured names noted above and include a who’s who of the sector (53% in the top 10 names). GDX is large ($4bln+), liquid and has a 53bp MER. My current gold allocation is a bit underweight at 2% of assets and is invested in Fidelity Select Gold Portfolio (FSAGX). FSAGX is small (<1bln) and more expensive (90bp), hence if GDX was an available option it would be my ETF of choice. GDXJ, Markets Vectors Junior Gold Miners is another option for those seeking the higher beta exposure to juniors/small cap exploration focussed players.

Choosing individual gold mining names can be perilous given the high degree of idiosyncratic risk. One name that John Hathaway, CFA Co-Manager of Tocqueville Gold Fund, consistently recommends is NovaGold (NG). NG’s primary asset is a 50% share (Barrick owns the other 1/2) in the Donlin gold project in Alaska, which is hands down the best potential new mine in the world. In terms of scale (39mm + ounces, 27+ year mine life) jurisdiction (USA baby) and grade, nothing comes close. The project is in the permitting stage and production will likely not start before 2019. Barrick offered $1.6bln for NovaGold in 2006 when gold was $600 an ounce. NG declined Barrick’s advances in 2006 and their market cap now stands at $1.35bln with $1,100 gold. The USA bought Alaska from Russia in 1867 for $7.2mm which equated to 2 cents per acre. The deal was nicknamed “Seward’s Folly” after then Secretary of State William Seward who penned the deal. Seward was accused of having bought snow but a short two years later in 1869 gold was discovered, as was oil decades later. While mining conditions are harsh this far North (pic of Agnico Eagle’s mine in Nanavut, Canada), I’d take them any day over Congo.

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James Grant, publisher of Grant’s Interest Rate Observer refers to gold as nature’s own bitcoin and holding gold outright has become both easier and less costly over the last number of years. GDL, SPDR Gold Trust at >$20bln is the big daddy ETF in the category and the the most cost effective means for most investors to gain exposure to the gold price. Gold, in physical form can also be held in your IRA. The two providers in the USA that I recommend are APMEX and Gainsville Coins. In a taxable account, gold is taxed as a collectible (26% tax on gain).

The performance of both individual mining stocks and precious metals funds has been deplorable on 1, 3 and 5 year horizons. Barrick (ABX) is up 14% ytd 2016 but the 1 year is -20%, 3 year -35% and 5 year -26.5%. FSAGX 5 year -20%. TGLDX (Tocqueville Gold Fund) 5 year -21%. Wading in at this juncture is contrarian. Keep allocations light. JCG

Note: Alaska facts from Tim Marshall’s “Prisoners of Geography” (2015).

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6 comments

  1. edgar

    I’m a seller. Gold sits there like a lump waiting for the greater fool. That’s all it does. That’s all it will ever do.

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  2. blahblahblah

    ABX has been an exceptional range trade. for god’s sake don’t tell anyone.

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    • firehorsecaper

      Re: ABX range trade. NG has also been, in CAD buy $4 and sell $5 has been a consistent pattern, until recently. I assume trailing stops on any single name positions as well.

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  3. levrage

    Good points. I am holding Jan 17 GDX leaps as a proxy for the metal itself.

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  4. pb

    As a long-time trader in this sector, I’m with you on your thesis. An upward correction is overdue and somewhat “natural” in the beginning of the burgeoning credit crisis. However, once the liquidation gathers steam, gold could – and should – get liquidated as one of the “better” assets held by hedge funds and the like.

    As to the miners…trailing stops might be in order.

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  5. firehorsecaper

    Grant Williams presentation link , 28 minutes if you have time. Common themes;
    http://www.goldcore.com/us/gold-blog/must-see-presentation-wealth-of-positive-catalysts-for-gold/

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