Private Investor - Newgold Was a Better Bet Than Gold Shares Hole Not Yet Dug [analysis]

Johannesburg, Oct 07, 2009 (Business Day/All Africa Global Media via COMTEX) -- NGD | Quote | Chart | News | PowerRating -- AS YOU well know, the Private Investor portfolio does not hold shares in a gold mining company.

Nor does it intend to buy shares in a company that wants to dig a hole to mine some gold. Instead It holds a stake in the exchange traded fund (EFT) New Gold Issuer (NewGold). The portfolio thus effectively buys gold bullion at the rand value of gold.

The portfolio bought 185 units at R53,60 a unit in December 2007. At market close on Monday Newgold's unit price was R74,24. The portfolio's paper profit was thus nearly 40% .

Over less than two years, the average annual compound paper gain on the investment is, therefore, approaching 20%.

As the objective of the investment is to achieve growth in excess of the rate of inflation, the holding has been more than meeting its aim.

Back in February, I was delighted when NewGold's market price was almost R100 mainly because the rand was trading at about R10 to the US dollar.

If the rand was worth R10 to the dollar now, NewGold would again be trading at more than R100. Its market price is much less than that mostly because the investment fundamentals of the rand have improved considerably since then.

One of the important investment fundamentals of the rand's exchange rate against the dollar is the gold price. This is because gold is one of the major components of SA's exports.

My gut feel in February when NewGold's price peaked told me that it would have been a good time to sell and then buy back when gold fell and the rand strengthened. The Private Investor portfolio investment strategy is to hold and buy, though not necessarily as a rigid rule. However, the strategy eschews trading for a quick profit. This, I have been reminded by several readers, is one of the reasons that the portfolio is carrying a substantial paper loss.

Many years ago, when Jean and I were trading in a small way, gold shares were the market in which we mostly gambled and mostly won. Our picks were usually marginal mines, whose share prices were sensitively acute to changes in the gold price.

Using technical indicators of market sentiment on the gold price and marginal gold-mining shares, we would act on sell and buy signals and trade in options. There was a ready market for call options -- the right to buy shares at a future higher price. Unfortunately, there was only a limited market for put options -- the right to sell shares at a lower future price. So unless we actually sold shares short, we didn't have an available reverse trade.

This limited our gambling market unless we were to sell shares short and cover the risk by buying a call option. As the capital for the trading operation was miniscule, and the cost of options and sales bit into the small margins, the market forced us to follow a bull strategy. Now, with a variety of warrants available -- puts as well as calls -- we could, perhaps have some fun and lose lots of money.

We have long given up trading and our only direct investment in a gold mining company is a small holding in Gold Fields , which is much more than a hole that is yet to be dug.

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