Gold is traditionally a hedge against inflation, so with the possibility of the inflation ticking up and the stock market taking a breather it could be time to look a adding gold to a portfolio as an inflation hedge and part of an overall asset allocation to reduce volatility. Direct investment in gold bullion has drawbacks in terms of storage costs and the fact that it doesn't offer any income, only (potential) capital gains. Gold stocks are therefore more usually selected where some gold exposure if desired within a portfolio. I have some gold stocks in my Australian stock portfolio (NCM), and I've just read about a US-based gold mining stock General Metals Corporation(GNLM). As a small mining company reliant on the redevlopment of one old gold mine the prospects of this company would be greatly affected by fluctuations in the price of gold. Their recent press release outlines the details of their gold mining interests:

Press Release:

Gold Expected to Dominate the Investment Horizon, Experts Advise Early Stock Purchases (Reno, NV – March 5, 2007) Traditionally, gold has had an inverse relationship with the stock market. When stocks go up, the price of gold usually falls; when stocks flounder, the price of gold usually skyrockets. Some experts believe it could mean a lot for investors in 2007, because gold is once again catching the eye of the investor. For General Metals Corporation, the news couldn’t come at a better time. “With our plans to begin drilling at Independence Mine, we’re more than thrilled to hear gold is making a comeback,” states company CEO Stephen Parent. “We’re even more excited with our location; it’s a proven producer.” General Metals acquired the Independence Mine in northern Nevada and became a public company last year, trading under the symbol GNLM. Predominantly a silver mine from 1938 to 1987, the Independence Mine is estimated to contain over two million ounces of gold, as well as over two million ounces of additional un-mined silver. As the Independence Mine is essentially an island within Newmont Mining’s Phoenix Mine, the area is already a proven producer. According to Parent, they plan to remove the precious metals in two phases. “Phase one includes our ‘shallow’ targets,” says Parent. “The shallow targets contain less gold, but they’re easily and quickly accessible, which will encourage early cash flow. Phase two is where the majority of our gold will come from. It’s deep mining, but we expect it to produce 1.4 to 2 million ounces of gold.” They expect to produce 20,000 ounces of gold in the first year, 60,000 ounces in the second year and 70,000 ounces in the third year -- approximately $101 million from early estimates. The company also anticipates an additional $1.36 billion to be gained from phase two production. In an effort to increase their mining production, General Metals has recently acquired the Nyinahin Mining Concession in Ghana. Located in one of the most active exploratory areas in the world, this concession shares borders with several major mining companies, including Newmont Mining, Napoli Gold and Dunkwa Continental Goldfields. “Financial experts are predicting gold to play a key role in investor’s profiles during 2007,” adds Parent. “But due to the timely nature, potential investors will need to act quickly in order to maximize their gains.”


One thing to check out in researching small mining companies is the cost of production - you wouldn't want to invest in a company that is only profitable at the current gold price.



Enough Wealth

This month I selected King Pharmaceuticals (KG) from the MagicFormula listing to add to my "Little Book That Beats The Market" Portfolio of US Shares (100% geared). I bought 260 KG @ $18.49. My US Stock Portfolio currently stands as:
Symbol P/E Last Shrs Trade Date Paid Comm Value Gain
HRB 27.74 21.48 200 28-Jun-06 24.16 130 $5,534.66 -$ 820.54 -12.91%
MOT 12.89 19.01 265 24-Jul-06 18.98 130 $6,490.15 -$ 119.76 - 1.81%
MSFT 23.79 27.61 200 21-Aug-06 24.64 130 $7,114.15 $ 635.29 + 9.81%
ASEI 22.64 51.78 100 18-Sep-06 49.51 130 $6,667.52 $ 162.31 + 2.50%
PWEI 6.65 33.32 150 13-Oct-06 33.29 130 $6,435.75 -$ 124.21 - 1.89%
OVTI 13.68 11.82 300 13-Nov-06 16.47 130 $4,566.06 -$1,926.25 -29.67%
EPIQ 11.60 18.24 320 11-Dec-06 15.65 130 $7,515.84 $ 937.22 +14.25%
CRYP 12.42 22.84 200 10-Jan-07 23.92 130 $5,882.05 -$ 408.14 - 6.49%
VRGY 47.26 25.00 270 14-Feb-07 18.29 130 $8,692.85 $2,203.16 +33.95%
KG 15.56 18.35 260 07-Mar-07 18.49 130 $6,144.24 -$ 176.88 - 2.80%
10 symbols Total(AUD): $65,039.86 $ 362.09 + 0.56%
The commision amounts include an allowance of another $65 for selling costs. There is no allowance for dividends received (around $300) or interest paid on the Portfolio Loan (currently around $400 a month).
At the moment the performance of this portfolio is largely governed by what individual stocks I have selected (semi-randomly) from the Lists genereated on the www.magicformulainvesting.com website. For example, in the first trade I was tossing up whether the buy H&R Block or Hasbro toys - in the end I chose to purchase HRB (which has dropped nearly 13%). HAS in the same period has gained in price. Over a period of several years, once I am fully invested (with a portfolio of 18 stocks), the performance of my particular portfolio should be more in line with what can reasonably be expected from application of the "Little Book" methodology.
My US Stock Portfolio now has the following composition:


Enough Wealth

Sponsored Post:

One of the nice things about sponsored posts is that they sometimes point you to a worthwhile site that you probably would not have come across otherwise. Debt Consolidation News is one such site. It has a nice, clean appearance, and is easy to navigate around the site (although there are some problems, which I'll cover below). The site has archives going back to June 2006, so it has been going for quite a while, and has a wide range of posts about credit cards, debt, getting out of debt, student loans, saving and various other related topics.

Browsing through the site some of the more interesting posts for me included one on "teaching kids about money" which linked to an article with a few good ideas on how to interest your kids in finances and money, and one on the 100 most famous quotes about finance (although I can think of a few other quotes that I'd have included in place of some of the ones on this list!).

However, one short-coming in the site is the very short list of categories. The side bar only lists seven major categories. While this helps retain the clean appearance of the website, I think it's a triumph of style over substance. Once of the beauties of the internet is that you can have multiple links to a page, so there's no reason not to use many categories to allow readers to easily find all articles relating to a particular topic, such as kids, education, student loans, UK, US, or whatever. The fact that there is no site search tool built-in to the site design makes this even more infuriating. While there's plenty of material here to interest you, you'll probably have to browse through all the archives to find the articles that you may want to read. So this site is more suited to browsing through at your leisure than for a quick visit in search of a particular debt-related topic.


Enough Wealth

Australian and the Asian Markets were all down again today - it looks like this may end up being a "real" correction of 10-15% rather than just a "blip" that we've had several times before during the past three years of bull run. It will be interesting to see what the US bloggers post tomorrow if the US Market also drops a couple of percent tonight - there were already some "newbie" stock investors posting comments about "crashes" or "corrections" after just dropping 3%!

If the market levels out after a 10-15% correction I may have to seriously consider whether to take a profit on my ASX200 Index Put Options, and hope the bull market resumes for the remainder of the year. Or whether to hold on to them, and possibly buy some additional Put Option Contracts so that I'm fully covered against a possible bear market (30%-50% drop?).

So far my Australian Stock Portfolio is down around $40,000 from the peak - it will be interesting to plot my stock portfolio "losses" vs. the "gains" on my Option Contracts that Comsec emails to me each day (based on the previous days closing "market price" for the Options Contract). In theory the 3 contracts should offset something like 25%-30% of my portfolio losses.

Enough Wealth

It turns out the $13,500 balance transfer to my day-to-day CC had come from my BankWest CC (I asked for the Balance Xfer when I accepted an increases credit limit for this card), not the new HSBC CC I'd applied for recently. It was just coincidence that the BankWest CC xfer happened at the same time the new HSBC CC arrived in the post. I rang HSBC to activate the new CC today and was told that the $10K balance xfer for this card had been processed on the 27/2 so there should now be an extra $10K credit balance sitting in my NAB day-to-day CC account. I'll withdraw that $10K on Monday and deposit the funds into my Credit Union account so it can be added to my online savings account earning 6.1%.

I'll have a total of $34,500 of 0% balance transfer funds invested at 6.1% once I do the deposit on Monday. $11,000 of this is from the Virgin CC where the 0% period ends on 10 April, so I'll be repaying this amount on 5th April (to make sure it gets processed before the Easter Holiday period).

The new 0% offers are only until August and September this year, so I'll have to keep an eye out for any new offers that arise in the meantime.

Enough Wealth

February was looking good until the very end when the Great Fall of China undid nearly all of the progress for the month. Luckily my retirement account did OK as I'd rebalanced it recently to reduce the excess allocation to Australian stocks that had developed over the past three years bull run:
* Average property prices were unchanged this month for the suburbs where my two houses are located.
* My stock portfolio equity went up only $3,523 (0.94%) this month but my retirement account increased significantly - up by $6,064 to $330,662 (up 1.87%).

My Networth as at 28 Feb now totals $1,066,778 (AUD), an overall increase of 0.79% for the month.

As discussed in previous posts, I'm bought 3 ASX200 Index 5500 Dec-20 Put options to partially protect against significant losses if the market drops substantially.

Moom asked what date the ASX200 Put Options that I mentioned in my previous post expire - they are the 5500 options which expire on 20-Dec (XJOQT). I bought them on 9-Feb at 158.00, so the 3 contracts (each contract is for 1,000 options) cost $4,795.77 (including brokerage).

For interest I looked up the ASX200 index (XJO) closing value and plotted it against the "market price" for the XJOQT options that Comsec has been emailing me each day since I opened my position. As you can see, the option price has a negative correlation to the ASX200 Index, but the correspondence isn't perfect as the market for the options is quite thin and the buy-sell spread is larger than you'd get trading stocks. As the Options don't expire until Dec-20 their current price is a combination of the strike price relative to the current Index value, and the "time value" of the option until expiry. At the moment it appears (from the graph of option price vs. index value) that each contract would be worth around $5,000 if the index dropped to the 5500 level (another 5.5% drop from current levels), but at the expiration date of 20-Dec the options would have no value above the 5500 level, and will be "cashed out" for $10 per 1 pt below 5500 on 20-Dec (if I hold them until expiry).



As my entire direct investment in the Australian stock market is around $600K each 1pt decline in the market costs me around $100. Therefore I'd have to be holding 10 of the Index Put Option contracts to be fully covered for losses below the contract strike price. With only 3 contracts I'd be making $30 profit on the contracts for each 1 pt decline to offset against the $100 loss on my stock holdings. As my stock portfolio is currently geared around 100% I'd need 5 contracts to make my portfolio losses match the actual % market decline below the 5500 level, and 10 contracts to be fully "insured" against any loss if the market drops below 5500 prior to Dec-20.

I'll buy another 5 or 7 contracts if the market resumes it's bull run and goes above the 6100-6200 level. Hopefully I can get fully "insured" against drops below the 5500 level for a total cost of around $10K (around 1.7% of my portfolio value, or around 3.3% of my equity). This would "cap" my exposure in a bear market to a maximum loss on my Australian stock portfolio to around $35K, or about 10% of my equity in AU stocks. I'd still retain my exposure to any upside if the market continues it's bull run. If the market gains another 10% by the second half of '07 (around the 6400-6500 level) I'll look to start selling off half my AU stock portfolio and use the proceeds to eliminate my gearing until the end of the next bear market is in sight (ie. All Ords back down to around the 4000 level).

Although this all smacks of an attempt to "time the market" I think it's prudent to make use of Put options when the market has gone up around 20% for each of the past three years, and to look at reducing my use of gearing when the market's p/e appears to be getting stretched at the end of an extended bull run.