My Precious Metals Investment Strategy

We are going to ignore the majority of metals found on the Periodic Table and focus instead on the more accessible investment grade metals such as Gold, Silver, Platinum and Palladium. I have to declare that I am no expert in these metals. But what I wish to share is my common sense approach towards this class of investment that appealed to my logical thinking, rather than employing complex academic models to confound, confuse, and convince you into believing something that is totally ridiculous.

A brief introduction
Precious metals, Gold in particular, have a history of being a symbol of wealth and were used as currency in many civilizations throughout the history of mankind. This is because Gold easily satisfied the criterion of a currency:

1. Divisible 
2. Portable
3. Acceptable
4. Scarce
5. Durable
6. Stable

Because of its glittering appearance and high malleability, gold is also highly demanded for jewelry, ornaments and decorations. At the dawn of technological advancement, gold has been discovered to have very good electric conducting properties that increased its demand for use in electronic devices and circuit boards. Demand for gold spans across a wide range of industries, and its versatile uses have pushed up its value tremendously over the years. In economic terms, price increases when Demand exceeds Supply.

As gold is not easily destructible, once it has been mined from the crust of the earth, it will be permanently added to the supply pool world wide. Because of its malleability, it can be recycled and reused for various purposes without degrading its fundamental properties. Although gold mines are still extracting gold, there is ultimately a point in time that gold will be fully mined. Therefore, this makes the supply of gold limited, which helps to preserve its value

Investment Rationale and Expectations

If you have read my article about my investment strategy where I briefly talked about my views towards this class of investment, you will know that I am using precious metals as a preservation of value and only expecting capital gains. For the layman, capital gain simply means buying at a low price and selling at a higher price to earn the price differential.

I have also briefly explained my views on the value vs price aspect of this investment class. Do bear in mind that different investors with different perspective can have different view of how precious metals can generate returns. For example, if you are a gold smith, gold becomes your merchandise that you trade with a markup attributed to the craftsmanship poured into the malleable metal. For a commodity trader, gold becomes a raw material that is traded based on the competitive market price pressures of supply and demand where profit is made on the spread between each trade. For a collector, gold made into bullion are valued based on its aesthetic and sentimental value not unlike art.

For individuals like myself, precious metals serve as a hedge against the worsening economic environment created by the short-term views that governments around the world are adopting to solve their economic problems.

If you are not aware of what is happening, many governments around the world are printing more money to pay off the debts that they have incurred because of their budgeting deficit over the years. Money printing has transcended beyond physically printing of notes. Banks and financial institutes have magically created tremendous amount of money out of thin air by extending easy credit.

Government have abused their reputation as a good borrowers to aggressively guarantee debts that were the byproduct of burst bubbles. These debts are toxic and have little hope of generating satisfactory returns because it was created by the greater fool game, a term coined by Warren Buffett. The greatest fools now are the government that are holding on to the debts in order to temporarily stabilize the economy. And their solution to pay off this debt? Print more money so that there will be inflation, which will make the real value of the debt shrink against nominal value.

Consequently, inflation will not only push up the price of precious metals, it will also destabilize the world economy further because any sensible person will know that debt is not repaid by more borrowing. Eventually, the ability to borrow will evaporate and the fiat money system will collapse like the many occurrences recorded in human history. Debt is repaid by spending less than earnings so that surpluses can be used to reduce the principle debt amount. When that collapse occur, people will rush into real assets and that sharp spike in demand will drive the price of precious metal sky high.



Ways to Invest in Precious Metals
With the rationale and expectations of this investment established, it is now time to discuss how an individual can go about building a position in this asset class.

There are multiple ways in which you can invest in precious metals. The simplest and most straight forward way is to own physical gold and silver. They can be purchased in the form of bullions coins, cast bars, pamp bars, etc. Aside from owning physical gold, all other forms of investment are derivatives of the real thing. Derivatives as the name suggests, derive value from the underlying asset that it is spun out of. You can own shares of precious metal mining companies, buy exchange traded funds that holds precious metals, or open a savings account that have your saving's value tied to the price of precious metals. None of these derivatives entitles you to the ownership of real physical gold.

The last example above is the focus of my discussion. I am currently invested in gold and silver via UOB's precious metal investment instrument. Why I chose to invest in gold and silver via a savings account is because of the following benefits that are critical to my strategy:

1. Low entry barrier
2. Low transaction cost
3. Low maintenance and holding fees
4. Live daily update of prices
5. High liquidity
6. Reputable intermediary that guarantees the safety of investment
7. Extreme ease of trade via mobile

As Benjamin Graham aptly stated, we are our worse enemy when it comes to investing. This is because of the misalignment between logic and emotion. Our fears can drive all rationality and reason into a corner and we often regret after making emotional decisions. Hence, my strategy involves minimizing my speculation and decision making process by letting my formulas determine the timing and quantity to buy or sell.

Because I am avoiding speculation, I do not want to put myself in a situation where I have to decide whether the current price of gold is cheap or expensive, or whether it will go up or down. All I need to do is to input the current selling price of gold reflected on UOB's website, and my excel spreadsheet will tell me the amount to buy/sell. The logic behind my formula is simple to understand.
It is the modification of an Averaging Down strategy.

Strategy Technicality
Based on my observation of the price movement of gold and silver since 2011 when I first came across this instrument, gold price bottomed at around SGD48 per grams and peaked at around SGD74/g. Silver bottomed at around SGD20 per ounce and peaked at around SGD60/oz.
Therefore, when the price of gold and silver has dropped from the peak to near bottom, I started employing my strategy to build up a position in gold and silver. As majority of my holdings are in gold due to a smaller spread, which translates to cheaper trader cost, I shall be using only gold as reference although I applied the same strategy to silver.

My formula takes reference from an entry price that I will have to decide initially. When price of gold was near the bottom of SGD50/g, I purchased a token amount as a base investment. From there, if the price of gold falls below the price of my last purchase, I will buy more. Meaning to say, each time I increase my holdings, I am only buying at a lower price than before. The quantity of which I purchase each time is a multiple of the difference between the current price and entry price. For example, if I had purchased my base investment at SGD50/g, and price fell to SGD49.5/g, I would purchase (50-49.5)*10 = 5g of gold, 10 being the multiple. So the lower the price of gold drops, the larger the quantity of gold that I buy.

Next, the determination of my Sell is the same logic as my Buy, where I will only sell when the price of gold is higher than my last sold price, with the quantity determined by the difference between my original bank sells price and current bank buys price. The only difference is that I am taking into consideration the spread, which is essentially the cost of transaction. Therefore, the lesser times I sell, the less transaction cost I will incur.

Gold will only become worthless if supply becomes unlimited and abundance, which is not likely to happen. Therefore, there is a margin of safety in that aspect. Price of gold usually drops when the market is optimistic about the economic outlook as investors will exit from the safe havens of precious metals into equities seeking higher returns. This euphoria is the best time to acquire gold as equities would be too expensive anyways. The reverse is also true where there is a crisis and the economy is uncertain, investors will flood into safe havens to protect their capital which would drive up gold price.

Summary
I am having a gloomy outlook in the global economy because of anti-fundamental and illogical economic policies being adopted by governments worldwide. Due to the limited supply of precious metal and its multitude of uses, I believe that they are good protection of value. Therefore, when a crisis strikes, precious metal will become overvalued as a result of investors rushing to seek protection in this safe haven asset. And when that happens, I will be able to methodically unload my investment holdings, based on my simple logic formulas, and reap the reward of patience, prudence, and practicality.

Thank you for reading, I hoped that you have enjoyed reading as much as I have enjoyed sharing. Feel free to leave a comment. If you like my article, please share it so that more people can enjoy it too.



Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.

I do not own any of the images used in this article.

My Investment Strategy

I am going to share with you my investment strategy that makes up my current investment portfolio. But do bear in mind that my entry price into these investments would not be the same as current price level. Word of Advice: The price you enter into an investment is as important as the quality of the investment itself. So be warned. And also, I do not have decades of proven track records, so I may be right or I may be wrong, do your own due diligence. This is just me building my record from scratch, for display decades later.

To start off, let's talk about my portfolio composition. If you have read my previous post about My Investment Journey, you would know that currently I am managing my mother and my girlfriend's money. Total Asset Under Management is approximately SGD130k. About 40% of this is invested in Equities and Preference Shares. 20% in precious metal & precious metal-linked investment vehicles. The rest is in Cash and Free Float (money that I hold for free but is owed to someone else).

Equities And Preference Shares
Let's start with equities and preference shares. Equities are also known as Shares/Stocks. I currently have 5 companies in my portfolio which I have determined to be undervalued. 4 of these companies were purchased before I attended Finance classes so I was only half aware of what I was doing. Although all of these companies are still generating returns, they have turned up sub par in my newly created stock analyzer. Currently, I am selecting stocks based on the following criterion:

1. 5 Year Average Growth Rate of more than 5%
2. Total Liability to Equity Ratio of less than 1:2
3. Positive Free Cash Flow for the Past 5 Financial Years
4. Average Return on Equity of more than 15%
5. Must be trading at 20% below intrinsic value calculated using a modified 2-stage discounted Free Cash Flow model (You can read up more about my valuation method in any of my company analysis: My Company Analysis)

Preference share is a class of investment that is a mix between Bonds and Stocks. It is like Bonds because it pays out fixed dividends on a predetermined period and it does not have any voting rights. It is like Stocks because it does not obligates the company to make dividend payments if it is unable to, unlike bonds which bond holders may force the company to default if payment is not made.

The preference share that I currently own is one of the earlier investments that I have made. It is Hyflux's 6% Preference Share that IPO-ed in April 2011. To date, the dividends were uninterrupted and I am quite happy with this investment. I intend to hold on to this investment until Hyflux decides to redeem them in April 2018, otherwise Hyflux will pay 8% dividend if they choose not to redeem it. 

I intend to rely on this class of investment to generate steady streams of passive income so that I will have the choice to forego active income (job). Value investing is a process that takes a lifetime of patience and discipline, and I am ready to devote whatever I need to accomplish it. Because I believe that the right process will eventually lead to the right outcome.

Precious Metal and Related Investment Vehicles

As of today, I have no means of valuing the glittering pieces of good electricity conducting, highly malleable, and non-corrosive metals that coincidentally, also served as currencies and symbols of wealth in many civilizations throughout human history around the world. One thing I am certain, is that there is a limited quantity of these metals here on Earth, as compared to the pieces of paper money that governments around the world can freely create and distributed.

To those who are still confused, I am referring to Gold and Silver. I believe that the price of Gold, Silver and other Precious Metal is correlated to the total amount of currency that is circulating around the world. Because $1 of a currency is supposed to be equivalent to $1 worth of asset, so if the quantity of asset doesn't change, the printing of an additional dollar would only mean that the same asset now costs $2. And because the governments around the world is aggressively printing money, the price of precious metal will eventually reflect the senseless borrowings.

Notice that I use "Price" to measure precious metals rather than "Value". This is because, the value of precious metal is determined by the functionality of its element. So unless new uses for gold and silver is discovered, the value of these metals does not change over the short term. Since price of Gold and Silver is the one that changes, investing in this category of investment is simply a preservation of value, with the intention to capitalize on the correction on the price, usually during a crisis.

Investment in Precious Metal does not and should not be generating any passive income because only price changes and not value. Therefore, we should only be expecting capital gains from this investment class. Nobody can predict when will price of precious metal change because it is determined by worldwide supply and demand. But fundamentally, we do know that printing more money to decrease the size of debt will only mean that there is more currency available to eventually bid up the prices of assets that has not changed its intrinsic value.

Check out my article on Precious Metals Investment Strategy.

Cash and Free Float
Ever heard of "Cash is King"? Well, being liquid is very important for a value investor as you would
never know when undervaluation of quality investments may occur. When it does, you would want to have the liquidity to soak it up. But having cash sitting in banks can subject your precious money to the erosive power of inflation.

However, I am able to set aside a sizeable amount of cash that is free of restrictions, while at the same time earn a satisfactory return that protects my cash from inflation. In addition, the condition for me to achieve the satisfactory return also granted me free float to earn extra interest. An extremely Win-Win situation for me.

Free Float is basically money that you hold for free that is owed to others. In another words, it is interest free debt. As an individual, there is very little access to free float legally. But they do exist and every opportunity to obtain free float should be exploited since it comes at no cost. Such opportunities exists in very prudent and disciplined use of Credit Cards. In most cases, the debt is money that you have to spend any way, so why not earn that extra interest to shrink your payables?

Check out my article on Proper Usage of Credit Card

This allocation of capital barely qualifies as investments, but its existence is critical for my investment strategy to work. As my exposure and knowledge of investment products grow, perhaps I would be able to discover more ways to remain liquid while still being protected from inflation.

Summary
As you can see, my investment strategy involves diversifying into different asset classes, with very clear purpose and expectations for each class of investment. Having a clear investment strategy is the first step towards successful investing and it is the individual's responsibility to determine their own objective and expectation when building their own portfolio. Due diligence is absolutely necessary. I suggest reading lots of classical books that have withstood the test of time, rather than new best sellers that could have been all hype and no substance.

Thank you for reading, I hoped that you have enjoyed reading as much as I have enjoyed sharing. If you like my article, please share it so that more people can enjoy it too.



Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.

I do not own any of the images used in this article.

List of Very Good Companies With Strong Fundamentals (2015)

I am sharing this list of companies that I believe to possess very strong fundamentals, worthy of value investor's attention. After analyzing 77 SGX listed companies using my new Analyzer Template, these 9 companies have scored full marks on my 4 criteria filter. It is my intention to continuously update this list as I analyse more companies.

Rather than starting from the first "A" company on SGX, I used Google's Stock screener to filter out a list of companies with the basic fundamentals to analyse. Google's stock screener can be accessed via this link: https://www.google.com/finance/stockscreener; or you can simply search for "google stock screener". The screener occasionally fails to load when I make changes to the options, but reloading the page a few times usually solves the problem. If you like to know how I use this screener, you can follow this blog for my post on using Google Stock Screener.

My 4 criteria filter are:

1. 5 year average growth rate must be more than 5%
2. Latest Total Liability to Equity Ratio must be less than 0.5
3. Must achieve positive Free Cash Flow (FCF) for the past 5 financial years
4. Average Return on Equity must be more than 15%

Identifying great companies that have very strong fundamentals and are generating a lot of profits may be important, but as a value investor, price is what you pay and value is what you get. If you pay too much for a great company, the returns might not be profitable at all. Therefore, paying the right price is also very important.

There is a theory called the Efficient Market Theory which states that the market will always reflect the fair value of every company based on all the information that is available in the market. However, I do not subscribe to this theory. Instead, I believe that the market is as Benjamin Graham describes, a temperamental fellow who will offer a different price for all companies each day depending on his mood. The market's mood can be depressingly pessimistic or it can be wildly optimistic, sometimes selling a company at very very low prices because of some temporary problems, sometimes offering to buy a company at very very high prices because of over-hyping of good news.

Therefore, the role of a value investor is to wait patiently for the market to be pessimistic, before taking the courage to buy great companies. This usually happens when there is a market crash. A value investor needs to have the courage to enter the market when everybody is rushing out.

Most of these companies are calculated to be overvalued at current market valuation based on my expected return of 18.45% per annum, which translates to 15% inflation adjusted return p.a for a holding period of 5 years. If you have a lower expected return and are willing to hold the stocks for longer periods, these companies may be the right companies to buy.

Only T T J Holdings was determined to be undervalued. You can read my analysis of this company here: http://fundamentally-invest.blogspot.com/2015/01/t-t-j-holdings-limited-fundamental.html

Below are the graphs of each company's FCF and growth trend for the past 5 FYs. Do follow my blog if you would like to receive updates of analysis for these great companies.

Design Studio Furniture Manufacturer Limited

Japan Foods Holding Limited

OKP Holdings Limited

Raffles Medical Group Limited

Sarine TechnologiesLimited

Silverlake Axis Limited

Straco Corporation Limited

TTJ HOLDINGS LIMITED

Vicom Limited

Thank you for reading, I hoped that you have enjoyed reading as much as I have enjoyed sharing. If you like my article, please share it so that more people can enjoy it too.



Disclaimer
This publication is for general reading only. The information and materials contained on this web site are subject to change without notice, are provided for general information only and should not be used as a basis for making investment decisions. It does not form part of any offer or recommendation, or have any regard to the investment objectives, financial situation or needs of any specific person. Before committing to an investment, please seek advice from a financial or other professional adviser regarding the suitability of the product for you and read the relevant product offer documents. I am not liability and will not be liable for any loss or damage arising directly or indirectly (including special, incidental or consequential loss or damage) from your use of this web site, howsoever arising, including any loss, damage or expense arising from, but not limited to, any defect, error, imperfection, fault, omission, mistake or inaccuracy with this web site, its contents or associated services, or due to any unavailability of the web site or any part thereof or any contents or associated services.