Upward Bias Toward Gold

$1,888 ...... How's that for a nice round number? It's hard to believe but bullion is now only 6% away from the $2,000/oz target price that I had in mind when I started my gold mining portfolio blog back on Feb. 5, 2009. At that time bullion traded 51% lower at $914. Strangely many gold & silver mining stocks are well below their 3 year highs and the TSX global Gold Index and other professionally managed mutual funds are just now re approaching their highs achieved late last year when bullion was trading $500/oz (26%) less than today. My portfolio is up 8% from its' Nov. 2010 previous high level and up 215% from Feb. 2009. This performance can be primarily attributed to my large position in New Gold warrants.

So is it time to cash in and leave the party before the lively music stops? I would say no for the following reasons:
1) Real interest rates are sharply below reasonable levels (inflation plus 2-3%).
2) The Fed has just promised to keep rates very low for yet another 2 years.
3) European sovereign debt issues are very likely to deteriorate much further.
4) American economic recovery is painfully slow and unemployment very high.
5) U.S. political will is without direction. Debt ceiling/entitlement debates intensify.
6) Growth in developing countries appears to remain positive at reasonable levels.
7) Inflation is not evident, in fact rumors of deflation linger.
8) SPDR Gold Trust inventories are increasing quite modestly with no evidence of rampant
speculation. Inventories fell during the Feb., 2011, Soros sell off by about 100+
tonnes and were replaced a month ago only to be sold off again. Inventories remain 40-50
tonnes below previous highs.

As Fidelity's Andrew Marchese, Head of Canadian Equities and Darren Lekkerkerker, Portfolio Manager said recently, "we are bullish on select gold mining companies more so than bullion because historically, well managed companies, will outperform the base metal by a large margin. There is an upward bias for gold that we can't see that changing anytime soon".

Knowing when to get out is trickier than deciding to take on an initial position. If you can stomach the risk, I'd hold onto gold stocks for a while longer at least until some of the eight points noted above show signs of significant change.

POLITICAL CHAOS, FINANCIAL CRISIS & CURRENCY

At my last posting in late Nov. 2010, I had realized a 197% gain in my portfolio since Feb. 5th, 2009 and as of today this stands at 156%. The last few months have been tough especially around mid-Feb. when I was scrambling to cover margin calls (my portfolio gain at that point was south of 100%). As the gold mining stocks declined sharply since the end of November, I moved out of cash and into margin... but alas I moved too soon and was caught in a dreadful margin squeeze. I had to dump another $80K of equity into my account because many of my penny-warrant holdings dropped below $2/share thereby making them unmarginable.

Now the investing public doesn't know what to make of gold assets. On the one hand they think bullion is too pricey at $1,430/oz but at the same time investors have to be impressed by gold's resilience. Try as they might, the pros could not hammer gold bullion down by more than $125/oz. That is a correction of less than 8%! They were able to hammer gold mining stocks however and they all but created a panic with several of my holdings. Yes folks, even the SPDR investors were dumping bullion with a reported decrease of over 76 tonnes from late Nov. 2010 to today in that one gold trust alone. That's a lot of bread with 32,150 troy Oz per tonne, we are only talking about $3.3 billion flowing out of SPDR!

One of these days SPDR investors will decide that they acted prematurely and heaven help them at that point. I'm sticking to my $2,000 oz prediction and I'm not doing much selling until we get there.