Get Ready for Gold and Silver to Head South

I have never personally liked precious metals like Gold (GLD) and Silver (SLV) - or the related Gold Miners (GDX) as investment vehicles. My basic objection is that they don't have any underlying logic for continued growth - they don't have any economic utility except being the object of speculation.

No doubt Gold and Silver have had an amazing run past few years - GLD has gone from 42 in early 2005 to  180+ in Aug 2011. That's 4x growth in 6 years - impressive - but in my opinion mainly because of the economic uncertainty of past few years. Since touching the high in mid-2011, GLD has been stagnant - and I don't think its going to come close to the high of 180+ anytime soon. If anything, I expect GLD to plunge as risk appetite grows in light of continued improvement in economic climate along with improvement in the stock market. The 2 year GLD chart clearly shows the current stagnant nature of Gold prices:

The downturn is more evident in the SLV charts.

Now, finally, the canary in the coal (gold?) mine - Gold Miners (GDX):

I think the inevitable pullback in precious metals is only a matter of time. I do not have any holdings in Gold or Silver. I am usually averse to shorting stocks - but I might be willing to bet some money on shorting GLD when the downturn becomes apparent.

Role of India

I have a long term bearish view of Gold with my view (wish?) that India will one day wake up from its addiction of Gold. As modern financial services penetrate the rural bits of India and more people become accustomed to letting their money work for them in stock/bond markets - I hope they will then stop blindingly putting their money in Gold. I further hope that the coming pullback in Gold prices will make people realize that Gold is not as safe a storage of value as they had hoped.

It might be really long before India's obsession with Gold will end - but when it does and India starts bringing its hoard of Gold into the world market - watch out. India is sitting on world's largest retail stockpile of Gold in the world - and sooner or later, that mountain of Gold will be taken out and sold - with the attendant collapse in Gold prices. It is going to happen - it will be a good thing for the country when it does - but that will be the last straw for the Gold market.

Some Interesting Data on Gold

All the Gold in world comes to around 165,000 metric tons. Annual production is around 2,500 metric tons - of which India consumes around 750, China around 430 and USA around 130 metric tons. (Source: NumberSleuth)

It is easy to forget that after the last big bull run in Gold prices that ended in early 1980s, Gold went through a more than 20 year bear market (not coincidentally, it was alongside a boom in equities) and lost more than half its value in that period. I believe we are done with the Gold bull run of the 2000s and are now heading towards a similar long term bear market.

After peaking in 2011, Gold imports to India are already declining. Indian households, it seems, currently hold more than 18,000 tons of Gold. In comparison, the entire GLD ETF - the largest Gold investment vehicle in the world - holds just about 1000 tons of Gold!

Taking Stock: Jan 2013

First month of 2013 is done - and what a month it was! Stocks did pretty well. My stocks did pretty well and I feel good about my investment decisions. Here is where things stand at the end of Jan - in the usual Taking Stock format:

Total Portfolio Value: 48.4 Units

Van Gogh: 12 Units. My largest account is currently sporting a 15% Bonds and 85% Stocks asset allocation. I have reduced my bonds holdings in anticipation of the coming bond crash. Bond holdings are equally distributed between long term treasuries, long term investment grade bonds and developing countries bonds. The 85% Stock allocation is divided between developed countries (25%), emerging markets (25%) and US market (35%). US market is further divided into NASDAQ Index (10%), S&P 500 Index (10%) and mid-caps and small caps (15%). This allocation is my stock-heavy allocation since I anticipate stocks to outperform bonds in next 3 months. I will adjust allocation in next rebalancing if I expect the relative performance expectations to change.

Bernini: 11 Units. Hope the professional folks are taking care of this. I am currently budgeting a 3% growth rate in this account. I hope they will prove me wrong.

El Greco: 11 Units. This account is my bet on professional money managers. Currently in a stock-heavy allocation of 10% long term investment grade bonds and 90% stocks. Fidelity Contrafund, Vanguard Wellington and American Euro-Pacific Growth each gets 20%, 20% to Developed Ex-US to bring some geographical diversity and 10% to S&P 500 to absorb the reduction on bond allocation.

Klimt: 4 Units. My safest account - a fixed rate fund that is currently paying close to 5.5%. The bad news is that this yield is going down every month. I will think about shifting this out once (and if) the yield goes below 5%.

Durer: 3 Units. Target Retirement Fund with 2050 target. It is currently 90% Stock (67% US, 23% International) and 10% Bonds. I have an IRA ready to absorb this old 401K account - will do the transition as soon as the current bull run in stocks seem like done. Right now this fund is just tracking stocks and doing quite well.

Bruegel: 3 Units. I have EPI, FXI and INTC here. All are long term holdings for me - all good so far. INTC is a little weak - but with 4.5% dividends - I have no complaints.

Monet: 2 Units. I am holding EWP and F here. Both are on a nice upswing. F took a bit of hit after the numbers last quarter - but is still fine. They are again long term holdings - so who cares - let them mature.

Da Vinci: 2 Units. JNK is showing some weakness along with the rest of the bonds world. This, however, I am going to hold steady. The plan is to just put back the monthly dividend (currently a healthy 6.78%) into JNK and increase the number of shares I have. I am not going to worry about the share price - it will get dollar averaged every month anyways.

Renoir and Turner: 1 Unit each in DEO and VZ. Both doing fine. In addition, I am holding various amounts of DVY in different accounts to hold small sums accumulated through dividends.

Growth Since Last Taking Stock

The Dec 2012 Taking Stock had the total account value at 46.6 Units - so we are looking at a growth of 1.8 Units - 3.86% in a month. A part of the growth is because if new contributions of course. It is likely that we will reach 50 Units of total portfolio value next month - that will be something to celebrate.

Artwork of the day - not really one artwork - but the place that holds Bernini's masterpiece - Santa Maria Della Vittoria Church in Rome. This is of special significance - since I will be visiting Rome soon and will be staying at a hotel right next to this magnificent building.