Last updated on November 14, 2008
 

IMPORTANT REMINDER: The major allocations (Stocks, Physicals and Cash) are the starting point for all portfolio transactions. They take precedence over everything else. They rule all actions. Every purchase and every sale is done within the limits set by them. I probably have failed to give this sufficient emphasis. I am adding the limits from now on, which should make them easier to understand. I haven’t changed the major allocations since last March (see Letter 19), and have no plans to do so now. Also, new transactions and comments will follow each allocation. Let’s see if this doesn’t work better.  I encourage you to read the last portfolio update dated 10-30-08 before reading this one.

NOTE: When I began writing this, I had no idea it would become this long. But I like this format, so I’m sticking with it. You can consider this both a letter and a portfolio update.
  

 
As you can see, my stocks increased from 11.4% on October 30 to 12.7% on November 14. I have been nibbling. Here’s why. This week, Ken Gerbino came out with an article entitled Gold Stocks: Important Info to Know. There is no one I am aware of who knows the gold mining business better than Ken. I urge you to study this article.

Also Fred Hickey, whose trading strategy over the past twenty years is almost unbelievable, said the following in his letter which came this week, “I am no longer in maximum defensive position, with most of my portfolio split between short term US Treasury positions and my huge precious metals positions. I still have my huge precious metals position, but it’s been shifted in favor of gold stocks.” He further revealed that he had taken a major position in the Market Vectors ETF Trust (GDX), which holds 30 of the top mining companies. I think GDX is the ideal vehicle for accumulating a position in the mining shares. I bought a 1.2% position this week. But for those who must use mutual funds, TGLDX and USERX are both very acceptable ways to participate is this opportunity.

[Note: An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. The underlying assets of an ETF can be stocks, bonds, cash or commodities.  If the underlying assets of an ETF are stocks, then an ETF is the same thing as a closed-end mutual fund, which has an unchanging number of shares that trade throughout the day on a stock exchange at whatever price buyers and sellers create through supply and demand.  For a detailed explanation of ETFs, please click here.]

As indicated above, I intend to increase my gold shares, but I will stay within my allocations because there is still risk in the stock market. When I (my experts) feel total capitulation has occurred, I will increase the stock allocation some. I do think the odds favor a decent rally in the stock market soon. If it occurs, then I’ll decide what to do. 

As always, I repeat, for money you don’t want exposed to high risk, stay with PRPFX. In my opinion, this is an excellent time to invest new money in PRPFX.
   

 
I have two transactions to report in my physicals. I bought a small initial position in a second agricultural ETF, symbol DBA. This seems to be Jim Rogers’ area of greatest interest over the past few months. Although the ag commodities prices have fallen significantly in the panic sell-off, their fundamentals remain unimpaired. World food supply is at a thirty year low, and demand will increase for years unless world population decreases. 

But I’m even more enthusiastic about my silver. Jim Rogers said the following in an interview November 3, “Silver will outperform gold as a hedge against inflation. Silver is down 33% this year, while gold has fallen 12%. It has been beat down horribly. If you put a gun to my head and said you have to buy only one, I would buy silver rather than gold.” I have never heard him use language like this before. He must consider that silver has reached the “hated asset” category. This is a pure guess on my part, but I would guess that possibly 99% of earth’s population either doesn’t know anything about silver, or considers it a poor investment. 

But ask yourself who the buyers were during the last few months while silver was being beat down from 21 to below 9 at the low. Those are the strong and patient hands holding silver. They understand that silver has been a store of wealth for 4,000 years, serving as money during much of that time, and has out lasted thousands of paper currencies which have become worthless during that time. And now Rogers has declared himself in that group. That was my signal, so I added to my silver in the $9 to $10 price range. I opened an account with the Royal Canadian Mint through Kitco. I received confirmation from the mint, where my silver is stored. I have the right to have it minted into silver Maple Leaf coins and shipped to me on request. If anyone wants to open a similar account, go to Kitco.com and click on Precious Metals Store, then on Kitco RCM Royal Canadian Mint Prestige Account.
  

Jim Rogers has said the US 30-year Treasury Bond is the last bubble in the markets. It is near a 26-year high price (low yield). He is shorting it. The vehicle he is using to do so is an ETF which double shorts the long bond. Its symbol is TBT, and it trades like any other stock. If you buy a share of TBT and the bond falls $1 in price, TBT should go up approximately $2. If the bond rises, TBT should fall twice as much. I bought an initial 0.7 of 1% position in TBT, and I am classifying it with my puts and calls.

SUMMARY

For the year-to-date, my portfolio is down about 9%. The Permanent Portfolio Fund (PRPFX) is down 18% year to date. This compares to the Dow Jones Industrial Average down approximately 35%, and the S&P 500 down about 40% for the year. Most overseas markets are down more than the US averages, some substantially more. PRPFX has served its safe-haven objective for low-risk investment, and I believe it is a good buy now. The silver arbitrage trade I described in the last update, along with my oil and gas production have cushioned my losses, otherwise my performance would be nearer to that of the Permanent Portfolio Fund.

Gold is down 10%, from 825 to 742, year-to-date. Silver has fallen from 14.77 to 9.47 year-to-date, down 36%. From their highs earlier (1032 for gold and 21 for silver) their declines are 28% and 55%, respectively. These current low prices are taken from the “paper” market (futures), and are bogus to some extent due to probable manipulation, not to mention the forced and panic selling by huge hedge fund redemptions, and fear on the part of the public. This is obvious from the cash markets which are significantly higher, with supply being nowhere equal to demand around the world. If I revalued my portfolio based on the cash markets currently, my performance would be much better.

This gives us a rare opportunity in gold and silver, and, based on ones tolerance for risk, the gold and silver mining shares. GDX, which I just purchased, fell 65% from its high earlier in the year to its recent low. This decline was completely detached from any kind of reasonable valuation, and offers a rare opportunity in my opinion. My favorite silver mining company, SSRI, fell from 45 to 6 at its recent low, which is ridiculous. They have over a billion ounces of reserves in the ground, none of which has been mined yet, therefore they haven’t been out the mining costs, nor sold their silver at these low prices. I couldn’t resist this price, so when it fell below 10, I added some at 8 and some more at 6. It closed this week at 9.

But, where are we in the panic sell-off in all asset classes? That’s the key question, and it’s not real easy to analyze. I start with this simple hypothesis (derived from my experts obviously). We are in a secular (long term) bear market in stocks, which has several more years to run. We are in a secular (long term) bull market in commodities and other physical assets, which has several more years to run. That’s the simple part.

The not-so-simple part is that during all secular bull or bear markets, there are cyclical moves in the opposite direction. For example, during the first three years of the secular stock bear market of the 1930s, from late 1929 to mid-1932, the Dow lost 89% of its value. But did you know that during those three years, there were no less than six cyclical counter trend rallies (some would call them cyclical bull markets) within the secular bear market? Here are the six gains of those rallies (get ready for a surprise), in the order in which they occurred: +48%, +16%, +23%, +29%, +35% and +25%. 

In like manner, our current secular commodity bull market will have periodic cyclical declines during its expected 17 to 20 year life. We are obviously in one of those now (very possibly the largest that will occur). I don’t know what the overall decline in commodities is, but many of them are down more than half.

Sooo, in view of the above, what do we do? Here’s where I’m apt to get in over my head in an attempt to make an answer short and simple. Such as it is, the answer is based on what I’ve learned from my experts. Broadly speaking, there are two models for investing, long term (secular) and short term (cyclical). Using the short term model, you trade in and out of a market seeking to gain from the counter trend moves as well as the secular long term trend. I’m not saying you can’t win using this method (there are a few great traders out there), but none of my experts use this approach. Therefore most of the rules I cite in my letters are out of step with short term trading. I would add an opinion that to succeed at short term trading, investing would probably have to become your profession.

So how do I use the long term model? I find out from my expert(s) if there is a secular bull market in effect with enough expected years to run to make it worth investing in. If there is (and I believe there is, i.e. the commodity bull), then I position myself on the buy side of the bull and ride it until my expert(s) tell me it has become over priced (or over owned by the crowd). And what do I do when the inevitable counter trend decline occurs? I have only two choices: (1) Ignore it. (2) If the decline creates extraordinary undervalued opportunities, and I have additional funds which need to be invested, add to my holdings.

I would estimate I have heard this advice from Rogers at least fifty times over the past few years. A few days ago he was giving an interview in Amsterdam. He was asked how much attention he pays to the markets. His answer was that he rarely even watches the markets, and sometimes goes weeks or even months without checking the prices of his commodities, since he’s not planning to sell them until 2017 or later. Lately, when he was asked about oil, which is down more than half, his usual answer is, “I’m not selling my oil, but I’m seriously considering buying more, along with adding to my agricultural commodities.” NOTE: Obviously there’s no way he can be unaware that oil is down more than half. By “watches” he means watching things on a daily basis, short term changes, etc. which will not affect his actions. 

“But wait!”, someone says, doesn’t Rogers own some stocks? Yes he does own a few. He has disclosed owning a few Chinese, Taiwanese and airline stocks (These are all I have heard him mention). For the first time ever, I recently heard him say he follows the hedge fund model. This means that any asset class he owns which is not in a secular bull market (such as stocks currently), are hedged with an equal dollar amount of shorts of other investments in that same asset class which he considers over priced. This tends to hedge out the market risk so that he can hold the few stocks he considers good value and gain whether the market goes up or down. At the moment, I’m doing very little of this. I’m happy with my allocations, and especially with the opportunities mentioned above.

More on all this later, God willing……………..Jay