My portfolio fell 1.23% in May. My year-to-date performance is now +4.19%.

V A L U E S Date Silver Price in USD Jay PF Index in USD Gold Price in USD Oz. of Gold / 1 USD JPF Index /Gold DJIA Dow/Gold 01-01-2000 5.00 100.00 282 0.003546 0.3546 11,650 41.3121 01-01-2010 16.92 396.85 1,097 0.000912 0.3618 10,600 9.6627 04-30-2010 18.64 414.78 1,179 0.000848 0.3518 11,009 9.3376 05-31-2010 18.37 409.68 1,214 0.000824 0.3375 10,137 8.3501   P E R F O R M A N C E Period Jay PF % Chg in USD Gold % Chg in USD USD/Gold % Change JPF Index /Gold % Change DJIA % Chg Dow/Gold % Chg 05-01-2010 to 05-31-2010 (May 2010) -1.23% 2.97% -2.88% -4.4770% -6.63% -14.40% 01-01-2010 to 05-31-2010 (YTD 2010) +4.19% 10.67% -9.64% -6.7162% -4.37% -13.58% 01-01-2000 to 05-31-2010 (125 mos.) +309.68% 330.50% -76.77% -4.8355% -12.99% -79.79%   Notes: (1) "USD/Gold % Change" is simply the reciprocal of the gold price in dollars. You cannot precisely compare the dollar with gold without adjusting for interest. The dollar earns interest. Gold does not. With interest rates near zero, this seems insignificant, but over time it is not. Interest rates must eventually rise. On the other hand, GATA and other experts on gold claim that the price of gold has been artificially manipulated downwards for many years by concentrated short selling on the futures markets. Some experts also believe that a significant percentage of physical gold supposedly held by futures exchanges does not exist. Furthermore, central bankers regularly talk down gold. After all, it competes with their fiat currencies and threatens their job security. (2) The Dow Jones Industrial Average (DJIA) does not include dividends given to shareholders. These are typically reinvested, but nowadays the dividends are usually quite small. It also does not include the brokerage fees and capital gains taxes that usually accompany investments in the stock market.

I made three small transactions in May. They are listed under Jay’s Recent Transactions. Here is my portfolio as of May 31, 2010:

CASH	25.9%	(MINIMUM 30%)  (US Treasury Bills 7.1%, HAGRF 6.2%, Bank deposits & Money Market 12.6%)
GOLD & SILVER	44.9%	(MINIMUM 30%) Gold – 16.5% (Swiss 1-oz bars 5.7%, 1-oz Kruggerands 10.8%)                          Silver – 28.4% (90% coins 19.3%, 1-oz eagles 2.5%,                                                  1000-oz bars 2.7%, SVRZF 3.9%;                                                  note: silver was down 1.4% in May)
MINING SHARES	17.4%	SSRI 5.5%; GDX 4.6%; SLW 4.1%; SA 1.4%; VGZ 1.0%; AUY 0.8%
NON-GOLD & SILVER PHYSICALS	9.6%	Oil & Gas W/I – 9.5% (Non-publicly traded investment)
PUTS & CALLS	2.2%
TOTAL	100%

Watching Paint Dry

That may be a pretty good description of what watching my portfolio has been like the last few months…boring. Times like this can be a temptation to do something foolish or risky in an attempt to create more excitement. I’m reaching the age where that temptation is not as strong as it used to be. But I do need to make an allocation change.

A Necessary Allocation Change

For several months my cash allocation has been below my target minimum of 30%. The reason is not because the portfolio is declining in value, but rather because I am disbursing a significant amount of cash for reasons which have nothing to do with investing. There’s only one way to bring the cash allocation back up to where I’d like it to be and that is to sell something else. Since my gold and silver allocation is 44.9%, significantly above the target minimum of 30%, it is the obvious candidate for a partial sale, especially silver.

I want to make it clear that my opinion of the prospect for gold and silver hasn’t changed in the least. I still believe we are early in the secular gold and silver bull market, and still likely several years away from the bubble stage, which I believe hasn’t even started. But in the interest of maintaining a good balance between inflation protection and deflation protection (as dictated by the Permanent Portfolio strategy), I need to make an allocation change, otherwise, as I continue to pay out cash, my gold and silver will become even more over allocated.

I actually took the first small step in reducing my silver in May by selling a .5% (half of 1%) position in SVRZF. Since SVRZF was selling at about an 11% premium above its net asset value the day I made the sale, I received $20.46 per ounce (net of commission cost) for the silver included in those shares. This is the first time I have reduced my total ounces of silver since I have owned it. My plan was to sell further small positions at higher prices. But immediately following this sale, silver plunged about 10%. So I decided not to sell any more until the price recovers.

I began studying the long term monthly chart of silver. Since 2004, the volatility has noticeably increased, exceeding that of gold by a wide margin. See below.

 
Charts provided by DecisionPoint.com

Not only that, but since 1980 the gold/silver ratio has increased from about 17 to its current level above 60, even reaching a high of 100 in 1990. Many experts believe that both of these phenomena have been caused, at least in part, by illegal manipulative trading in both metals. Because the silver market is so small compared to gold and many other commodities, just three or four large traders using large concentrated short positions can greatly suppress the price of silver, holding the price far below what it would be in a free market. According to these experts, this has been happening for the last ten to twenty years. This has been widely covered in the press recently, and is currently being investigated by the Commodity Futures Trading Commission as well as the Department of Justice. The investment bank purported to be the largest of these manipulative traders has even been named in the press. It is J. P. Morgan.

I will not pursue further the pros and cons of this story. You can find much coverage on it if interested. (See my March 2010 portfolio update.) But as I studied the chart, the thought occurred to me that as an alternative to simply selling some silver and raising cash, I might consider trading some of my silver I hold in excess of my minimum target allocation. My reasoning is that if this manipulative trading, which has been so profitable for the traders, does continue, why not profit from it? They have created a wonderful opportunity for average investors to invest in silver at great values. As the saying goes, “If you can’t beat them, join them.” I haven’t decided yet, but that’s what I am considering.

I have never recommended short term trading, and I am not recommending it now. But because of the rare (perhaps once in a lifetime) opportunity I see in the silver market, I have worked out a plan for profiting from the actions of the manipulative traders. There’s no guarantee it will succeed, but I like the risk/reward ratio. If any of you are interested, you may see the details here: If You Can't Beat Them, Join Them.

Common Stocks

My position on the stock market has not changed. I believe a new a secular bear market in stocks began at the turn of the century, even as a new secular bull market in gold and silver began. Acting on that thesis has been very rewarding. I further believe both of these secular trends have several more years to run. The modest position I hold in gold and silver mining stocks (15% at cost) is a long term speculative investment on the gold and silver bull market. My mining stocks could fall and fall substantially in the coming years, but I am prepared to stay with them until gold and silver reach the bubble stage at which time I expect them to outperform almost everything. If I owned any other common stocks now, I would sell them.

Final Thoughts for the Month

He who gathers in summer is a son who acts wisely,
But he who sleeps in harvest is a son who acts shamefully.

(Proverbs 10:5 NASB)

 
To everything there is a season, 
A time for every purpose under heaven: 
... A time to plant,
And a time to pluck what is planted;
... A time to cast away stones,
And a time to gather stones;
... A time to gain,
And a time to lose;
A time to keep,
And a time to throw away.

(Ecclesiastes 3:1-6 NKJV)