How to build “The Golden Portfolio”

We have a unique situation in the world today where all of the critical value drivers for gold are pointing in the same direction.

• An increasing percentage of gold is being retained as a portion of foreign reserves in many countries, but most importantly in Russia and China;
• A combined massive Chinese trade surplus of real economic goods and the resultant US trade surpluses of exported US dollars;
• Low gold prices in the 90’s causing cuts in exploration and diminishing production; and
• The ‘War on Terrorism’ financed by massive deficit spending and resulting weakening of US currency.

There is also concern about negative real interest rates, where the rate of inflation exceeds interest rates. This trend erodes purchasing power and the confidence in paper currency falls. Gold however is a ‘hard asset’ with an intrinsic value that paper money does not have and it is therefore a reliable asset of value.

These above factors have resulted in a long term bull market in gold which commenced in 2002. The price of gold has gone from $278 in January 2002 to $634 in July 2007, an increase of 128%. During the same period, the Dow is 4% below its 2002 value and the US Dollar index is a staggering 29% BELOW its 2002 value.

With knowledge of this information, which is rarely found in the general or even the financial media, an irrefutable argument can be made for including gold in your investment portfolio. Gold continues to be dismissed or marginalized by a majority of investment advisors as merely ‘insurance’ for your portfolio. As a form of insurance, gold - as the only ‘real money’ for time in memoriam, certainly is excellent, but under the current set of very unique circumstances, gold and precious metals in general, may be far more important to you than a mere financial insurance policy. Gold can provide an opportunity for growth and profits as well.

If the decision is made to add gold to your portfolio, then just how would you go about doing it?

The options include, physical gold in the form of bullion coins and bars, gold certificates (like those offered by the Perth Mint), gold passbook savings accounts (available in Malaysia at Maybank), electronically traded funds (ETF’s), numismatic (rare) coins, bullion banks with allocated or pooled bullion accounts and shares in gold mining and exploration companies who own gold reserves that are still in the ground.

There are advantages and disadvantages to each of the various forms of gold ownership. The traditional ‘gold bugs’ tend to prefer physical gold in hand (or buried in the back yard) whereas investors tend to prefer more tradable forms of ownership like ETF’s and shares. The very private tend to prefer foreign holdings in private bullion banks. A mixture of several forms of ownership is the usual outcome for people who opt for gold. As you become familiar with the gold market you will gain understanding and more confidence about the available asset mixes.

Still another option which provides for growth and profits, can be obtained by investing into the merchant banks that structure and finance the transition of exploration companies, to production companies. That is where the real profits are made, at the beginning, so finding a way to participate there, provides the best opportunities for making money.

There is nothing wrong with owning shares in gold companies, but even owning the bluest of the blue chip producers like Newmont Mining (NEM) means that you have paid a premium price for shares at many times earnings. With the recent run up in gold and shares, most gold companies are very expensive. That is because the share value is determined by market sentiment alone.

There are companies whose shares are below their net asset values and offer potential for very good growth. The trick is to find them!