Monthly Archives: August 2013


Building a Gold Investment Portfilio

Investment in gold as gold bullion and gold coinsIn the last article we took a look at how it is that an investor could take on exposure to 6 individual securities to create a level of exposure to the gold industries that would be similar to building up a portfolio consisting of equal holdings across 5 different mutual funds. The conclusion made was that these 6 securities represent the back-bone of gold mutual funds, and can be used as a back-bone for our own personalized investment portfolio that doesn’t cost expensive management fees.

From there, we can start to look at how it is that this portfolio can be further diversified to create a high-quality investment portfolio that takes advantage of world class management. That being said, remember that this article is here to serve as an example of what kind of options you have available to you as a personal investor. Talking to an adviser about investment strategies you read about online is always the best way to go.

The first step to building up an individualized gold portfolio to determine how much of it should be composed of reasonably safe assets, and how much should be built up of assets that create ‘excess’ return (ie. undervalued assets that have greater volatility, and will generally outperform the back-bone assets over an extended period of time). In general, portfolio theory suggests that we should do at least 50% of our capital into the back-bone assets in this particular situation, because of the way in which this grouping of gold stocks will actually be included in a personal portfolio that contains a variety of other assets.

From there, we can go anywhere up to 80% or 90% of the assets into this portfolio, depending on risk tolerance. Remember, these main securities will actually represent a good indication of the industry’s actual returns, and could realistically be held on their own to create reasonably measured exposure to the gold industry. Upon determining the amount of lower-risk assets to put into the portfolio, we can now differentiate our overall position from the passive mutual fund by building up the ‘excess return’ portion of the portfolio.

The second part of a personalized gold investment portfolio should be composed entirely of assets that are undervalued by the market, and presenting long-term growth potential that will exceed the market returns of the industry. As a general rule, this means that it will be composed of small, junior-producers that are developing a resource base with a great deal of potential, but require time and capital to develop. These growth stories are particularly volatile over the short term, are not particularly liquid, require a greater investment time-horizon, and require a great deal of investment expertise to identify.

That being said, if the gold industry does well over the long term, these companies will perform the best, so we want exposure to them. Since we have already minimized our portfolio costs by buying 6 back-bone securities, we can place the remaining of our funds in an actively managed specialty fund that focuses in on investing exclusively with junior production companies, and has a reputation for being directly involved with the companies they finance. These funds invest exclusively in the kinds of undervalued assets that create returns on the long term, whereas our previous mutual fund options would have simply indexed their smaller positions to a large number of potential candidates and managed the positions passively.

The end result is the creation of a portfolio that will replicate the returns of the greater mutual fund industry in the gold industry, while maintaining best-practice exposure to the expertise of world-class fund managers pursuing value and growth in the juniors space. While we still need to pay a management fee on the juniors fund, it is interesting to notice how this cost will usually balance out against the savings in the back-bone portfolio, meaning that we’ll be paying the proportionately same amount in fees, for a greater level of service.

Examining Gold Mutual Fund Holdings

Gold investment strategies have enjoyed a particularly glamorous investment discussion over the year. Between the huge volatility implications of macro-economic trends, and the micro-economic challenges of producing companies creating returns for investors through their resource bases, and the financial issues surrounding a emerging difference between demand levels for physical and ‘paper’ gold, investors have spent the year juggling around a variety of different gold-related asset classes to try and maintain their exposure to the precious metal.

From the perspective of a personal investor, we can see how it is that the mutual fund industry provides us with the best opportunity to access this kind of exposure because of the way in which the provision of diversification and scale keeps things affordable on an individual scale. However, with hundreds of mutual fund options available to us, all of which with similar holdings and return profiles, it can be hard to decide which fund we should buy into. With the help of a little bit of number crunching, this article is going to illustrate an alternative option for investors that allows them to invest directly into gold stocks in a way that replicates a portfolio of mutual funds, without as much cost. From there, we can take steps to diversify the portfolio on our own to suit our own investment profile.

In reviewing the top 5 gold mutual fund performers with a reasonably long history of operations (symbols of: EKWYX, OGMNX, TGLDX, IGDYX, FGAPX), we can notice right away how it is that each of these funds has anywhere between 43-57% of its entire portfolio invested into its top-ten holdings. While these funds are holding more than 50 equities each, the fact that we are paying somewhere around 1.5% in management fees per year for such a heavily weighted portfolio brings up some questions about what it is exactly that we’re paying for. Given that these funds are putting such a large weighting on their top-ten holdings, we can take another step to determine just how important fund managers feel that these positions are by comparing them all together to see what a portfolio of all of the top-ten holdings of these five mutual funds would look like, to see if there are any trends that emerge.

Gold Mutual Funds

If we were to create a stock portfolio of all the top-ten positions of the 5 mutual funds examined into this study, and weighted the holdings accordingly to how it is that each fund has placed the individual holdings in their own portfolios, we’d notice that the effects of the over-weightings actually stack. What we can essentially see here is that mutual fund managers in the gold industry are not only heavily weighing their funds in favor of their top-ten holdings, but they are all choosing the same individual securities as being their favorites.

With respect to our above 5 mutual funds, a portfolio of 6 individual equities would actually represent an extremely similar profile to what the portfolio of mutual funds would demonstrate (symbols: GOLD, GG, ABX, EGO, NCMGF, NEM). What’s more, if we look at the average returns of the mutual fund portfolio against these 6 securities, we can see that the mutual fund portfolio lost 33% over the last year (remember, this is because gold just took a bit hit from Europe recently), and the securities portfolio only lost 27%. While this isn’t really a thorough evaluation of the scope of the returns, it does provide an indication that we might be looking in the right direction with this train of thought.

So what does all of this information mean? It means that mutual fund managers in the gold industry all seem to believe that these 6 securities represent a very strong back-bone for a gold portfolio, to the point at which they are representing a great deal of their portfolios with these securities. Assuming we can purchase these securities with a $5/lot brokerage fee, it means that an investor with more than $2,000 is in a position to consider building up their own personal portfolio of these 6 securities as opposed to buying into a mutual fund, because of the way in which the cost/return profile works out in their favor. From there, the investor can further diversify themselves to create their own personalized gold investment portfolio, at a lower cost, and with a greater flexibility than had they gone with a straight mutual fund.