Portfolio Update

Just before the close today, after some pondering Our Man decided closed out 1/3 of the GLD position in the portfolio account, though GLD remains a sizable portion of the portfolio (see below).

But why so?
OM continues to lean towards a deflationary view of the world, and thinks that GLD offers a decent hedge against any and all of bad Fed governance, a weak currency and an EM-style ’sudden-stop’ and as such GLD remains a valuable part of the portfolio (especially given it is anchored around Long-end Treasuries).

However, there are a number of other things to consider, which reflect Our Man’s way of thinking. Conceptually-speaking Our Man doesn’t view his GLD position as 1 position, but rather mentally splits the holding to reflect 3 time horizons (though even this is a simplification, as he tries to view it in 2 dimensions, based on both time horizon and price). Thus he broadly viewed the GLD position as 25-33% short-term (c1-4mos), 33-67% medium-term (c4-12mos) and 10-15% long-term (12mos+). As such, today’s reduction represents the elimination of the original short-term position. When we began this portfolio in early September, gold was trading beneath its March-high but was threatening to break through these highs; hence Our Man thought it was a reasonable opportunity to take a short-term position.

Why sell now?
Firstly, price…gold did indeed breakthrough its March highs, and has continued to climb leading to a tidy profit on the short-term piece. Secondly, it’s a far more popular trade now (Our Man remembers when “activism” started to get viewed as a strategy, rather than as a tool for achieving an objective) and that brings inherent risks with it. Furthermore, Our Man wonders…if everyone believes that Gold is a good hedge against (inflation/bad FED governance/etc) does that mean it’s more likely to fail to behave as one? (He’s certain there’s a smart name for that type of thing, but can’t remember it) or more simply put, is Gold more likely to behave as a good hedge when it’s not widely held and subject to the investment whims, decisions and liabilities of the many holders? Finally, and relatedly, Our Man doesn’t believe in religion (never has, and despite Mrs. OM’s best efforts probably never will) and when he hears many rail with such certainty against fiat currencies and their weaknesses, even though Gold itself’s value is largely dependent on people’s belief in its value rather than its economic value, he cannot help but smile a little skeptically.

What about the rest of the GLD position?
Well, Our Man still believes that Gold has further to run…and would be looking to put in the equivalent of a rolling stop behind the 50-75% of the remaining position, should Gold run through $1,250. Should it fall back, through the March highs, he’s also likely to close out that portion of the holding.

However, things are never so simple and one-dimensional and Our Man also considers the portfolio context. Currently, with just a L TLT/20yr+ Treasury position that is simple, but Our Man has also been investigating adding some new positions to the portfolio both on the Long-side and the short-side (through puts). Should he do so that would impact the amount of market-related risk he would be willing to accept (either negatively, or positively, depending on the other positions)

Portfolio Positioning (cob 11/18/09):
L GLD 37.44%
L 20yr+ Treasuries 39.93%
Cash 22.64%

Disclosure: Long Gold and TLT/Individual 20yr+ Treasuries