Gregor Weekly Model Portfolio Update: 25 November 2009

• Gregor Macdonald
• November 25th, 2009

Today I’ll respond to a query from a subscriber, who has wondered if the exposure to gold, silver, and gold mining equities in the model portfolio is perhaps too aggressive.

Gregor,

I really enjoy and learn from your writing and analysis but I was hoping you could shed a little more light into your approach to portfolio allocation and risk control. I agree with you that the arguments for PMs are sadly compelling these days but 52% allocation to precious metals and stocks strikes me as quite bold. Are you as aggressively positioned in your own personal holdings beyond the model portfolio?
I also reluctantly agree with your analysis that another deflationary collapse would only lead to more inflationary responses from governments but I am curious if you have an investment response in mind should gold get dragged down with everything else in the true debt collapse we fear or for other reasons. Would you then allocate even more resources to gold, sit tight or scale back?
Obviously I realize the difficulty of answering vague hypotheticals but I am mainly trying to get comfortable with the risk profile of a portfolio so heavily weighted towards assets that are notoriously volatile and hard to value (no matter how compelling the fundamental and technical setup may be). Thanks for your efforts,

Ben

I share alot of these concerns myself. Having watched gold and all of its intermarket relationships since earlier in the decade I have had to accept that every step of the way, gold and precious metal mining stocks (PM stocks) have remained risk assets. Not an anti-risk assets. However, when this blog and model portfolio service launched in late August I had two ideas–or questions–that I felt were worth exploring as we headed into Autumn. First, was it possible that liquidity and reflation would finally take hold, and lift assets higher despite a terrible economy? Also, was it possible that gold, if perhaps not PM stocks, would migrate back to the anti-risk category?

I conclude we only have partial answers to these questions, at this time. Yes, gold and PM stocks have blasted away to the upside and they have done so even when broader markets are weak, and, when systemic and macroeconomic concerns have been elevated. However, other global assets like emerging market stocks and junk, low quality stocks have made even larger moves since September 1st. As I have written, the coverage of gold’s move higher is quite breathless given the moves made by broad indexes such as Brazil’s, for example.

That said it does appear that gold bullion has caught on as a global solution to the very worrying structural problems facing the world, now exposed to the bursting of the debt and credit bubble in the United States. While I remain wary of the PM stocks I felt it was a decent risk-reward to own them, rather than shun them, in the portfolio. Unlike gold bullion however, they have to be watched more carefully, more skeptically. Additionally, I will assume many have noticed that gold mining companies are having a hard time making money. While some might argue this has always been the case, the physical-geological issues that affect gold mining extraction now look alot like the challenges faced by oil extraction.

Perhaps gold has only migrated half the way back from the risk category, to the anti-risk category. For, despite the dire fundamentals for the US Dollar and US Treasuries, there remains a good prospect that when global equities take their next tumble or especially when sovereign debt risk breaks out again somewhere in the world, that both of these assets will rise. But perhaps what’s changed is that gold too will rise under such circumstances. At the very least, the US Dollar may have to share some of its previous role, with gold. In the near term, subscribers know my view as to when a battle for the Dollar is likely to take place.  Now that we are below…(this article continues for subscribers through the membership gateway, on the right side of this page)

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More from Gregor Weekly

• Gregor Weekly Model Portfolio Update: 23 September 2009
• Gregor Weekly Model Portfolio Update: 10 December 2009
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