The third quarter of 2012 was one of the best for gold and silver investors in over two years. Now the question is should you just hold anticipating more gains or should you sell and take some profits. We were bullish long-term on gold and silver. However in our opinion in the short-term, the time has come to sell portions of our positions, take some profits and reduce our exposure.
Many precious metals investors take the view that to ever sell some of their positions is a somehow a vote of no confidence in metals or that you're just speculating like when trading stocks. However investing in metals does require some market timing calls and discipline in taking some profits over time to excel at it. It can enhance your overall return and reduce the overall level of portfolio volatility. The only potential downsides are metals prices could continue higher without a pullback. That is why we don't consider selling our entire position, just a portion of it. Also, short-term capital gains taxes on precious metals are taxed as ordinary income and not at the lower rate on capital gains like for stocks and bonds.
However paying taxes on booked profits that are retained can be better than giving back large portions of hard earned gains. Go back to last year and you can see that by the fall of 2011 if you hadn't booked some profits, you could have given back all your gains. If you had bought the gold ETF (NYSEARCA:GLD) at around $150 in May 2011, it peaked around $180 in September just a few months later. However if you just held without taking any profits, you gave up all your gains by the end of December. Not only has it taken nearly a year to get back to near the old highs, your nerves as an investor would have been damaged. Even worse if you were new to metals and purchased at a higher price, say $165, your losses might have forced you to panic and sell at a loss near $150.
Of course over time we don't know where metals prices will be going and we can't assume prices will follow last year's pattern, so we still always want to have a core position in gold, silver and some mining stocks as our financial insurance policy. So instead of making an all or none buy or sell decision, there are alternative options. You could choose to sell 33%, 50%, or 66% of your position. We choose to sell half of our positions. This booked our profits, retained half of our original positions and provides us with cash in order to add back to our positions on any pullback.
We went into the quarter fully invested because of two things:
1. At the beginning of the quarter gold, silver and especially mining stocks were out of favor and relatively cheap.
2. We anticipated that the Federal Reserve would extend and expand its policy of Quantitative Easing which is in essence printing additional money.
The situation that we were hoping for -- that the Federal Reserve extended its insane monetary policy of trying to print and inject excess liquidity into the financial system -- occurred just like we predicted. Not only is the U.S. Federal Reserve pursuing this policy currently but other major developed nations such as Europe and Japan are now printing money and we anticipate additional government's will adopt the policy.
In our suggested precious metal ETF model portfolio, we began the quarter 100% invested. In fact we were the equivalent of 140% invested by owning some leveraged gold and silver futures ETFs. Our ETF model portfolio was the equivalent of being 90% long gold and 50% silver. This produced a 23% gain for our model ETF portfolio beating gold alone by 12.38% and the S+P 500 by 17.27%. The outperformance of the model portfolio versus the physical metals was achieved mainly by using leverage. We also had the equivalent of 40% exposure to silver which was the quarter's best performing asset class.
We have learned over time that precious metals are very volatile markets and could have a 5-15% correction at any time. We are also very weary when silver has exploded higher because at $34 now, it is much riskier short-term than when it was $27. So we suggested that our member's sell both of our 200% silver (NYSE:AGC) and 300% leveraged gold ETF (NASDAQ:UGLD) positions and also take profits on some of our physically backed ETF positions in (PHYS and SIVR) . The result is we now our 40% long gold, 10% silver and 50% in cash. So in essence we booked profits and reduced our exposure from the equivalent of 140% to only 50%. Now our strategy will be to watch and wait to see what happens in the metals and financial markets and look for opportunities to add back to our positions on pullbacks.
Our second model portfolio, which consists of both gold and silver mining stocks, had an excellent quarter. We went into the quarter 100% invested with 50% primarily gold miners and 50% silver miners. Two stocks really drove our performance with American Barrick (NYSE:ABX) and Coeur d'Alene (NYSE:CDE) mines both gaining over 48.5%. Our two smallest gainers were Newmont Mining (NYSE:NEM) at 15.82% and Endeavor Silver (NYSE:EXK) at 23.50%. The total return for the quarter was 33.3%, which outperformed our benchmark of the goldminer ETF (NYSEARCA:GDX) by 12.2% and the S+P 500 by 27.6%.
Back at the beginning of this quarter, the gold and silver mining stocks were out of favor and all of them basically were bargains, now the mining stocks seem pretty fully valued short-term. So we suggested our members also book some profits in the miners. We reduced our exposure and sold 50% of our mining positions so that we are now only 50% invested in miners and 50% in cash in our Mining Stocks Model Portfolio.
So to summarize -- while we're still bullish long-term on precious metals that after a stellar quarter for gold, silver and mining stocks, the end of the quarter was the right time to book some gains. In fact, we reduced our exposure by 50% overall, booked very nice profits and will look for opportunities to add back to our positions on any pullbacks.