Diary of a Private Investor

Prospecting for Gold

I have written before on these pages about the unusual behaviour of the UK stock market this year and the uncertainty in global equity markets. Perhaps more worryingly is the bubble that seems to be forming in global bond markets. This article from HL yesterday provides a good overview of the yield landscape and why gold and other precious metals is looking to be one of the few safe havens for investors.

Personally, I have reached the conclusion that gold and to a lesser extent silver, are essential components of my portfolio in these uncertain times. Partly, it is a hedge for my equity holdings but even if there is not a major crash/correction in equity markets, I believe the short and medium term prospects for gold are strong. A look at the gold price chart shows that it is approaching a 3 year high and might potentially go on to challenge the all-time high that followed the great financial crisis if equity and bond markets do take a significant tumble.

Therefore, I have been researching and deciding the best way to gain exposure to gold, given that I have limited experience and expertise in this area. I currently have four holdings that account for around 15% of my overall portfolio value:

Anglo Asian Mining (AAZ)
I have now built a relatively large holding in this gold, silver and copper mining company with extensive assets in Azerbaijan. At the current price of gold, this is an interesting recovery play with the company generating significant cash and aggressively paying down its rather large debt. With production increasing and operating costs reducing, a £20m market capitalisation looks like it offers good value on a medium term view. Of course, one has to allow for a certain degree of political and currency risk. Against this, there is also the prospect of bumper returns should the price of gold and silver continue to rise while the company moves towards overall profitability.

Golden Prospect Minerals (GPM)
This is a closed-end investment company that invests in gold and precious metal companies and the share price seems to track the price of gold pretty closely. It is also trading at a decent discount to its underlying assets. This is a relatively short-term position for me and I am solely looking at this holding as a portfolio hedge.

City Natural Resources High Yield Trust (CYN)
This is an investment trust that targets capital growth and income from mining and resource stocks and fixed income securities. Overall exposure to gold is around 20%, the yield is currently 4.87% and the shares trade at a decent discount to NAV. I like the balance and diversity of investments of this IT and plan to hold it long-term for both the yield and ongoing exposure to the wider mining and resource sector.

Great Western Mining Corporation (GWMO)
The first thing to note with this holding is that it is a very small punt in relation to my overall portfolio. It is difficult to buy shares in any size, trading is very illiquid and I could not even buy small quantities without going through a dealer. This said, it is a gold exploration company valued at around £1m and it seems they might be on the brink on proving up their resources and moving into the production phase. If that is correct, the share price could rise rapidly but there could also be a fund raising that dilutes existing shareholders. As a small punt, it will be interesting to see what transpires here but I am a long way from taking a larger position. In reality, I will probably exit this holding rather quickly – i.e. within a month or two.

I believe the probability of a continued bull run on gold is high but of course, nothing is certain. Whether my investment selections provide a suitable mix of exposure to this sector remains to be seen. I will of course let readers know how I get on.

 

Disclosure – At the time of writing, I hold a long position in AAZ, GPM, CYN and GWMO

 

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