Crazy Talk on Gold and Silver

Today I'm going to think through a key position in my investment portfolio: Gold.

Some people think investing in gold is a scam. Gold is an investment popular with the conspiracy end-of-the-world late night infomercial crowd. Only crazy people buy metals, right? 

My grandfather bought silver bars and hid them in a wood pile in his back yard. Legend has it that he bought the silver bars when the Hunt Brothers were attempting to corner the silver market in the late 1970s and silver was skyrocketing. Eventually the Hunt scheme, deemed manipulation, was torpedoed and silver tanked. He probably lost a lot of money. Maybe that's why grandpa hid the bars. I'll talk more about silver later.

So why should a sane investor even consider silver or gold?

Take a look at GLD (the gold ETF tracking the yellow metal's price) since 2004, compared to the S&P 500.



What?

Over the past 16 years, GLD is up 237%, and the S&P is up 110%?

Past performance is not a reason to invest. Here are the factors I'm looking at, and will try to look at in any investment.

GLD
  1. The logical case. Gold often works in a time of crisis, and responds favorably to government attempts to stoke inflation / Fed rate cuts. 
  2. The technical case. The long term chart for Gold shows an uptrend -- higher highs and higher lows. Short term chart shows a potential inverted head and shoulders bottom (see pic below).
  3. Investment horizon. If this plays out like 2008-2011, this could run for 2-3 years. 
  4. Buy point. I think we're in the buy zone right now (around 150), anticipating a move up to new highs (above 160).
  5. Sell point. A break below 148 would put the short term technicals at risk.
  6. Account type. Considering time horizon, longer term accounts like IRA or HSA would be preferable, unless I purchased short term calls for the breakout. 
  7. Confidence level. On a scale of 1-5, I'd put this fairly high, around 4. Unless there's a foolproof virus treatment or vaccine imminent, governments will do all they can to keep rates low. Stars are all aligning for new all-time highs in GLD. 
  8. Amount to risk. I like concentrated positions -- 10 or so -- rather than a huge scattered portfolio that I can't track. I'm comfortable allocating 15% of my stock portfolio in GLD or gold-related stocks.

Gold-related Plays

For a while I've held some gold-related stocks too, which I would include as part of this allocation. Gold miner ETFs GDX and GDXJ, and a single mining stock Barrick Gold (GOLD). All of them got hit in the crash but are bouncing back. Somewhat surprisingly, the single stock has held up best. 

Gold miners *should* do well but it doesn't always hold true. Oil / fuel costs are an input to mining, so oil's demise should be a tailwind. Some mines have reduced staffing due to the virus, so that's a potential headwind. 

Mining stocks are more or less a leveraged play on the price of gold. Right now they are lagging but could see a very big move up if gold jumps or even just stays at these elevated levels. I give it medium confidence.

What about Silver?

Grandpa would probably not be buying silver right now because it's not going up like a rocket. He wasn't a buy low kind of guy. But here's some crazy talk. The 100 year chart may be showing yet another inverted head and shoulders to buy into.



I also heard somewhere that the silver-gold ratio is at its widest in 5,000 years. Well, that sounds crazy. But it's true the price of silver, as compared to gold, is very low. 



I'm not smart enough to understand this relationship. Silver, if it gets going, can have an explosive jump upward. Therefore, it may be worth a short term bet on silver. Right here SLV is already at a low level. That huge move on the chart took place in less than a year in 2010, after the depths of the financial crisis and after price turned up in conjunction with GLD. This is something to watch. I'll be looking for opportunities to buy SLV calls as it gets going. 

Crazy Talk?

GLD, Gold Miners, SLV ... is this all crazy talk? Will these investments end up in the wood pile?

I'd not want to take any thesis too far. In my mind, GLD is the conservative play with the best setup. Gold miners and SLV are more speculative and uncertain. I plan to allocate accordingly.

Note: This is a personal blog for me to think out loud. I'm not an expert, investment decisions are your own.





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