January 8, 2004
The Trick is Knowing When To Sell Your Silver & Gold

Given that over the last month the U.S. dollar has been trounced, stocks have rallied, and gold has surged, it is difficult to find a more dreadful set of speculations than those offered by Mr. Faber in early December:

“Short term, commodities including gold, equities and the Euro seem to be somewhat overbought, while the US dollar and bonds are becoming oversold. Therefore, my bet for the next month or so is to liquidate US equities, and to go long on the US dollar and bonds.” Dr. Faber

Timing miscalculations aside, some of the speculations offered by Mr. Faber in December could be playing out today.  And while short term trading in any market is better left to those individuals with a strong stomach and deep pockets, the long-term investor cannot help but wonder what is going to happen next. Indeed, the long-term psychical gold/silver investor that is already staring at profits cannot help but wonder whether or not it is time to sell following what has been an unrelenting rise in gold/decline in the dollar since late 2003. 

My Viewpoint on Gold

Given that the original platform for purchasing gold/silver was to hedge against a weakening US dollar, the realization is that unless you believe the US dollar is done declining that moving out of precious metals and into something else may not yet warranted. Quite frankly, and notwithstanding differing rates of interest, moving out of precious metals now and into assets backed by say Euros or Loonies is to essentially bet against the US dollar. If you are making any bet against the US dollar (who isn’t these days?) you probably still want to do it with some gold.

Forgive me for sounding like Richard Russell, but gold takes you out of the paper currency game altogether.  As central banks around the world respond to fluctuations in their currencies – and as these volatile fluctuations potentially lead to competitive currency devaluations and/or protectionism - this makes gold a more appealing investment alternative. Moreover, and since I believe (perhaps incorrectly) that gold is in middle stages of a multi-year bull market and that the US dollar is being debased into a death spiral, I don’t see gold reaching its peak without a climactic end. 2004 has been bullish for gold thus far, but hardly climactic.

Yes, there have been a lot of newcomers to the gold rally and an ominous threat, in the near term, is that these newcomers will soon be coined latecomers.  Those that have arrived late to the gold party could potentially leave the market aggressively when the music stops -- envisioning gold below $400 an ounce at some point this year is easy to do if you try. 

Nevertheless, unwilling to make bold short term speculations a la Faber, the question I ask is how could funds from any potential gold/silver sale be successfully reinvested someplace else? Given how dynamic gold/silver are as an investment instrument – a case can be made that gold will do well whether the future is deflationary, inflationary or stagflationary – the safe alternatives to precious metals are?...

In short, once owned strictly as a US dollar hedge, you own gold today as a fiat currency hedge. The wheels have been set in motion for a violent period of currency adjustments and battles, and gold is the most stable currency on the planet.  You sell your gold/silver when you find a more attractive use for the capital.  In other words, you sell gold when you think that the pricing environment is about to stabilize.

And yes, quoting Russell verbatim -- ‘when you diversify out of dollars into gold, you THREATEN THE CENTRAL BANK PAPER CURRENCY SYSTEM!’ – you should always remember who you are up against when you hold gold.  Remember also, perhaps after the next violent rally to say $450/$500 an ounce, that nearly every goldbug has a paper selling price.  The trick for the long-term precious metals holder may not be to try and time the final climactic rally in gold to perfection, but to simply look for attractive investments other than gold before the final wave of gold latecomers do.


 

a