My portfolio rose 0.92% in June. My year-to-date performance is now +5.16%.

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 05-31-2010 18.37 409.68 1,214 0.000824 0.3375 10,137 8.3501 06-30-2010 18.62 413.45 1,242 0.000805 0.3329 9,774 7.8696   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 06-01-2010 to 06-30-2010 (June 2010) +0.92% 2.31% -2.25% -1.35% -3.58% -5.75% 01-01-2010 to 06-30-2010 (YTD 2010) +5.16% 13.22% -11.67% -7.98% -7.79% -18.56% 01-01-2000 to 06-30-2010 (126 mos.) +313.45% 340.43% -77.29% -6.12% -16.10% -80.95%   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 seven transactions in June. They are listed under Jay’s Recent Transactions and discussed below. Here is my portfolio as of June 30, 2010:

CASH	30.4%	(MINIMUM 30%)  (US Treasury Bills 4.5%, HAGRF 6.2%, Bank deposits & Money Market 19.7%)
GOLD & SILVER	45.2%	(MINIMUM 30%) Gold – 16.8% (Swiss 1-oz bars 5.8%, 1-oz Kruggerands 11.0%)                          Silver – 28.4% (90% coins 19.5%, 1-oz eagles 2.5%,                                                  1000-oz bars 2.7%, SVRZF 3.7%;                                                  note: silver was up 1.4% in June)
MINING SHARES	12.4%	SSRI 5.4%; GDX 2.6%; SLW 4.4%
NON-GOLD & SILVER PHYSICALS	9.6%	Oil & Gas W/I – 9.6% (Non-publicly traded investment)
PUTS & CALLS	2.4%
TOTAL	100%

Raising Cash

As explained in last month’s update, I needed to raise cash because I was disbursing it for reasons unrelated to investing. A quick comparison with last month’s portfolio allocation reveals that most of my increase in cash came from sale of a portion of my mining shares. Cash increased from 25.9% to 30.4%, and the mining shares fell from 17.4% to 12.4% in the month of June (Note: In addition to the sales proceeds taken out of the mining shares which were sold, the change in market values of my mining shares still held also influences these numbers. See the important discussion on the mining shares below).

A Look Back

I begin this month’s comments with a simple look back to the late 1990s. All during 1998 and 1999, Jim Rogers was telling us that the great secular bull market in stocks, which began in 1982, was ending, and a new secular bull market in commodities was beginning. (See Jay's Working Hypothesis for more details). Rogers’ thesis was corroborated by several other experts I follow. I made the decision late in 1999 to begin building my portfolio on this assumption. I began reducing my stocks and buying gold and silver as they were the safest commodities and the easiest to buy and hold in ones possession. They also reduce or eliminate counterparty risk and systemic risk. On January 1, 2000 I started keeping records tracking my portfolio as well as gold, silver, and the Dow Jones Industrial Average. That’s what you see in the chart above, a complete performance record on these assets from 1-1-2000 through 6-30-2010, a 126-month period of time.

Now think a moment about this one simple fact. Over the 126-month period, gold has increased from $282 to $1,242, an increase of 330.4%. This is a compound annual rate of growth of 14.9%. During this exact same time period, the Dow index has fallen from 11,650 to 9,774, a decline of 16.1%. That means that denominated in terms of gold, stocks (as represented by the Dow) have lost 80.9% of their value over this period! Here’s an easier way to understand that in my opinion. On January 1, 2000 it took 41.3 ounces of gold to buy the Dow index. As of June 30, 2010, it took only 7.9 ounces of gold to buy the Dow index. Stocks have relentlessly lost value against gold over this 126-month period. This simple thesis is all one needed to know in 1999 to get a safe annual return of about 15% per year.

Two Key Questions

First, am I implying that gold has always gained against stocks as it has these last 10+ years? By no means! The current secular bear market in stocks was immediately preceded by a secular bull market in stocks which ran from 1980 to 2000. This was the golden age for the stock market, during which stocks gained about 10% per year in dollars, but actually gained about 20% per year against gold. See My Working Hypothesis, especially Charts 1 and 2, for an explanation of the causes of these long secular bull and bear cycles.

That brings us to the really key second question. Where are we in the current secular bear stock – secular bull commodity cycle? The answer according to the consensus of my experts: probably about half way. In 1999, Rogers predicted about a 20 year period during which commodities would go up several hundred percent while stocks would be flat to down over the same period. So far he’s perfectly on target. Of course, the actual length of this cycle is unpredictable. His original forecast of an end in the cycle between 2017 and 2020 still looks as good as any to me. But that’s not the really important aspect of the question.

The big question is, if you have not participated in the cycle up to this point, have you missed the major portion of the opportunity? And here the good news is that the answer is no! There is a very simple reason. These long cycles tend to evolve into a “bubble” phase near the end, during which the public recognizes the asset of choice and begins to pile in wholesale. The price begins to increase exponentially and finally ends in a blow off bringing the cycle to an end. This has been common to all the major bubbles in history, the Japanese stock market in 1989, the US stock market in 1999, the gold market in 1980, the tulip mania in Holland in the 1600s, etc. It’s not unusual for 75% or more of the entire move in price to occur in the last 10% of the time period, or even less. During the 10 year gold bull market of the 70s, the full move was from $35 to $850, a move of 24.2 times over the ten years. But only about 12% of the full move occurred in the first 7 years. The other 88% occurred in the last 3 years, and most of that during the last three months of 1979 and the month of January, 1980.

My conclusions:

1. We are nowhere near the bubble phase of the gold bull market. There is no disagreement among any of my experts on this point. There are several reasons for this conclusion which I will not go into here.

2. If I had not participated in the gold bull market up to this point, I would definitely begin getting on board. But I would use a dollar cost averaging approach because there will be fluctuations up and down, some of them violent, before this bull ends. That means I would begin making small purchases at periodic intervals, accelerating the purchases following declines of 5% to 10% or more. I would work toward a maximum allocation of 30%.

3. My personal conviction is that silver has a greater potential presently than gold. Therefore I chose to make my initial allocation 10% gold, 20% silver. That’s where I started out a few years ago. Presently my total allocation has grown to 45.2% for both metals because the market value of the metals brought it up to that level. I am comfortable with this level because of my conviction that we are not in the bubble phase yet. You must act on your own convictions about your total allocation as well as the ratio between gold and silver. I will point out that one of my experts sees a better potential for gold than silver currently, and another is silent on any opinion. The others seem strong in their conviction that silver has a much better potential. My reasoning is simple. I can’t imagine silver under-performing gold by any significant amount (and it hasn’t during the 126-month period), but it should have an excellent chance of out-performing gold for the simple reason that its above ground supplies have been in decline for years while demand, both industrial and investment, has grown steadily. Why then has the price ratio of gold/silver increased from 17 (the level it held for 2,000 years) to around 70 today? I have dealt with this question several times recently. I will just add here that there is substantial evidence of a massive fraudulent manipulation of the price of both gold and silver over at least the last ten years. The effect on the silver price has been far greater than the effect on gold because of the tiny world supply of silver compared to gold. This information is finally out in the open and even in the press. Thousands of investors have complained directly to the governing authorities, and a public hearing has been held. No action has been taken to correct the manipulation. In my opinion none will be taken by the governing authorities, because it would be devastating to their fiat paper currency fraud (the US dollar), and the US government would then find it very difficult pay back all its unfunded liabilities, pay interest on all its debts and continue funding all its 700 military bases in 63 countries around the globe. Therefore, in my opinion, the manipulation will end when the world wide supply and demand dynamics of physical gold and silver force it to an end. That could be months or years into the future, or it could be next week. I may not see it in my lifetime, but I am at peace. The gold and silver I hold are not mine anyway. I am merely stewarding them for God. The details are completely committed to Him.

The Gulf Oil Spill

You might wonder why I bring this up at this point in my comments. My expertise on this subject is essential nil, and my opinion essentially worthless. Yet, I believe I have a valid reason for bringing it up, if for no other reason than as a lead in to my next comment on the mining shares.

If you’ve been following the news, as well as many analyses on the internet by experts on the off shore oil drilling business, you know there is a huge range of possible scenarios which could play out for this disaster. They range from stopping the leak in a reasonable time, cleaning up as well as possible, then relying on the ocean to do most of the cleaning up as it has for past spills, all the way to an explosion of a big bubble of methane gas below the ocean floor which would create a huge tsunami which would flood the gulf coast from Texas to Florida. I have no idea what will actually happen. But there is one man who is an expert on the oil drilling business in whom I have confidence. His name is Matt Simmons. He is Chairman and Chief Executive Officer of Simmons and Company, a Houston based investment bank that specializes in the energy industry. I have read his book, Twilight in the Desert, the coming Saudi oil shock and the world economy. Mr. Simmons is highly respected for his expertise on oil drilling. A few days ago the Washington Post quoted Mr. Simmons as saying, “We’re going to have to evacuate coastal areas of the gulf states.” I don’t know exactly what Mr. Simmons meant by these words, but assuming the quote is accurate, I would take it very seriously. I would not want to risk what might happen if he is correct. Another event with possible negative financial consequences would be a war in Iran. My reason for mentioning these here is to challenge all of us to try to factor events like these into the financial crisis our nation has gotten into over the past 2 or 3 years, and then ask ourselves what effect it might have on the stock market if the nation has to face one more major crisis. That brings me to my comments on the stock market in general and my mining stock portfolio in particular.

The Gold and Silver Mining Stocks

Here are the headlines to Chris Weber’s July 1 issue of Global Opportunities Report: 

CONTINUE TO MAKE GOLD AND CASH THE CENTERPIECE OF YOUR HOLDINGS

DEFLATION REMAINS THE IMMEDIATE DANGER

YOU SHOULD BE OUT OF THE STOCK MARKET;
THE BEAR MARKET RALLY IS OVER, AND THE BEAR MARKET RESUMES

Chris Weber has a stellar long term track record. I take him very seriously, and I agree with his current position. For the record, he also holds silver, but his silver position has a lower market value than his gold. What then should my posture be relative to the mining shares? I have kept my mining share position a small enough part of my portfolio that I would be willing to stay with it through thick and thin until the bubble phase of the secular gold bull arrives. That has been my position since the beginning of the gold bull market.

WARNING TO MYSELF: Unless I am willing to risk loss of most or all of my present 12.4% position in the mining shares over the next year or so, and hold it until the bubble phase of the gold bull market arrives, I should reduce or eliminate it. (NOTE: I would make exactly the same statement about any other common stocks, if I had any, which I don’t).

In the last few days my thinking has begun to change. I think the next leg down in the stock bear could be a disaster. And since the mining shares are acting more like stocks than like gold (i.e. they haven’t yet decoupled from the stock market as they have in the past during the bubble stage of a gold bull), why risk that capital, especially since my experts all believe we are not near the bubble stage?

Therefore, I may reduce my mining shares at any time. I’ll let everyone know immediately if I do. By reducing my mining shares, might I be missing part or most of a big move up? Certainly! But one of the lessons I have learned over the years, the hard way, is that one should never equate lost opportunity with lost capital. They are very different! If my experts help me identify the bubble phase, I will likely want to hold some mining shares…well and good. If not, I will remain content without them.

Wisdom to Ponder

He who works his land will have abundant food, but the one who chases fantasies will have his fill of poverty. (Proverbs 28:19, NIV)

Dishonest money dwindles away, but he who gathers money little by little makes it grow. (Proverbs 13:11, NIV)

Be patient then, brothers, until the Lord’s coming. See how the farmer waits for the land to yield its valuable crop and how patient he is for the fall and spring rains. (James 5:7, NIV)