2010 Review: Dollar Substitutes

Includes: BAC, C, DIG, GLD
by: Thomas Noon

So, how was 2010 and why? And, what will be good for 2011?

My theme for 2010 was caution and practicality. The overall theme that I bought into in 2009 and carried into 2010 was "dollar substitutes”. This came in the form of gold, oil, and banks in 2010.

Biggest portion of my 2010 portfolio: Energy. I was a student of DIG between $80 and $100 in 2008 and resisted buying into the mania. I watched in amazement as it fell sharply below $60 in September, 2008 when everything was falling. Then, I lost some money when I bought after it fell under $40 and then had to sell to cut losses and sell as it fell further. But, I was sold on the idea that oil and gas were not going to zero in my lifetime – although I was cognizant of the risk that Cap & Trade could do permanent damage to stocks like Exxon (NYSE:XOM) and Chevron (NYSE:CVX). I began accumulating DIG in early 2009 as it slipped under $27 and then, following my faith in the fact that it would recover within 1-2 years, I bought at $24 and then again at $22 -- but then doubled down when it hit sub $19. This took some gut-checking and a long-term perspective.

The plan was to sell the higher-priced shares during the recovery. Eventually, this faith paid off (although I’ve had to worry myself through many dips and rises in 2010). So, I am now holding my sub $24 DIG and have sold all the rest. Oil is helped by imminent inflation and the “peak oil” theory that predicts ever-falling new discoveries until oil is an energy source of the past. Oil is hurt by the continuing “global warming” scam that refuses to die the death that it deserves. Doubters check here. In 2010, further damage and investor fear was done with the BP oil spill in the Gulf. This too was overblown -- some were even predicting that the entire world's oceans would be tainted for decades. The panic and fear was classic and caused classic buying opportunities.

Core holding until something big changes: Gold. Inflation is a fact of life in reflection of the mismanagement of government finances. A simple truth: government cannot stop itself from spending other people’s money. Politicians are simply in stark denial that the mountains of debt they are building (on top of the mountains that were built by their predecessors) will end in financial disaster and an utter loss of faith in paper money. A basic concept for me: I will hold no more cash or cash equivalents than I need to pay bills for 2-3 months (like money markets and CDs). It is just paper. It is no longer a safe haven and it does not hold value.

Financials: The banks were in a state of shock and awe at the beginning of 2009 and into 2010 and valuation of future profits were difficult to measure. But, C and BAC appear to be survivors and so, for long-term investors, will likely pay well for patience. Bank of America’s recovery has been slow but 2015 will likely be a much better day for BAC. The same is true for Citigroup (“C”). Much has been written about the cleanup and rebuilding within Citigroup and so I will not repeat it all here. Suffice it to say that I am a long-term believer.

GLD, C, and DIG are all going to be held by me for multi-years, thereby answering another big financial planning need….long term capital gains tax treatments.

Long-term planning for 2012? What will I be studying most and cautiously accumulated in 2011? What is now getting oversold in select locations, too cheap in best locations, and falling still further as 2011 begins?

Lucy from Peanuts said it best: “real estate”.

Disclosure: I am long DIG, GLD, GDX, C, BAC. Long physical gold.