Making sound investment decisions is difficult. And the greatest enemy to investment success is us, the “human factor”. For instance, we tend to overestimate our ability to process and properly weigh all the information needed to make an informed investment decision. Sometimes we become fearful, we even panic, or we become greedy, and then we make really bad investment decisions – like buying too late or not buying at all. Or selling too early or selling too late. The list goes on and on.
The difficulties of making sound investment decisions apply, of course, to all kind of assets and markets, including the precious metals space. Therefore, the question is: Are there any general guidelines, or recommendations, which might help to improve your investment outcomes, especially as far as precious metals are concerned? I believe there are (at least) three.
Recommendation #1: For most investors, a “market timing” strategy is a very difficult thing to do. In a bull market, people all too often buy when prices have reached their peak already. And in a bear market, people sell when prices have fallen to record lows and are moving up again. Especially short-term oscillations of market prices (say, over a week, quarter, or year) are hard to forecast correctly. So if you see some sense in these words, simply take a long-term view: If you buy something, make sure that you wish to hold it for, say, three to five years or even longer – and in the meantime don’t pay attention to the short-term ups and downs of the market.
Recommendation #2: If you operate with a fairly long-term investment horizon, there is no reason for you to equate price volatility with investment risk. Market prices move up and down for all sorts of reason. The really important thing for a long-term oriented investor is to make sure that one does not suffer a permanent capital loss. Example: You pay 100 US$ for an asset, and subsequently, its market price falls to 5 US$ and does not recover. That said, you should do your homework before you buy or sell. Especially make sure that you know the “value” of the asset you wish to buy and studied the risks attached.
Recommendation #3: Make sure that the price you pay for something is below its value. Adhering to this rule reduces the risk of suffering permanent losses, which may occur if you overestimate the value and pay too high a price. Also, paying a price that is below an asset’s value bolsters your investment return. Of course, sometimes, it is hard to say what the value of a given asset might be. If you don’t know an asset’s value, you better refrain from buying it. Look for other opportunities you are comfortable with in terms of assessing.
Against this backdrop, this is what you should do with gold and silver.
If you wish to make an investment decision with a long-term orientation, physical gold and silver may fit into your portfolio structure well. The two precious metals can be considered a hedge against the vagaries of the worldwide unfettered unbacked paper money system. Their purchasing power cannot be debased by central banks running the printing press.
If the last decades taught us any lesson, it is that gold has been outperforming US-dollar, euro and Co in terms of preserving, even increasing, its purchasing power. Given the growing problems of the international unbacked paper money architecture, there is a good chance that gold will continue to outperform official currencies for at least two reasons.
First, a resurgence of consumer and producer goods price inflation – as a result of the excessive money creation at the hands of central banks – is likely, and chances are that this will lead to a structural increase in the demand for gold, supporting a higher gold price going forward.
Second, political efforts to bring about a “Great Transformation”, a “Great Reset” of the world economic system, as pushed forward by many governments around the world, has the potential to cause great damage to growth, employment, and financial stability, problems which will most likely be addressed with even more excessive monetary policies, providing an additional boost to investor demand for the yellow metal and thus its price.
The critical issue clearly is, of course, how to determine the value of gold (and silver, for that matter). While there is something like a “formula” when it comes to assessing stocks and bonds (at least in theory, namely the present value model of future cash flows), we do not have anything comparable when it comes to assessing the value precious metals.
However, we think that, in the long-term, there is a relatively stable relationship between the world’s money stock, real interest rates, and credit market conditions. Against this backdrop, we estimate that the current “equilibrium price” of gold (the price that is suggested by the current state of the macro-economic variables identified as explanatory factors) is around 2.500 USD/oz.
This price is well above the current 1.800 USD/oz, offering quite some upward price potential for the long-term oriented investor. However, one cannot say with any degree of precision when the market will push the gold price towards the estimated level. The take-away is that gold isn’t expensive; in fact, bought at current prices, it appears to be a great bargain.
That said, silver deserves special attention. It tends to be dragged up once the price of gold moves higher. And as the price of gold is typically pushed higher in times of monetary and financial turmoil, there is a good chance that investors will increasingly seek silver for monetary purposes – as suggested already by the strong inflow of money into Silver Exchange Traded Funds.
The bottom line is, we believe there is currently a good opportunity for the savvy long-term oriented investor to buy and keep building physical gold and silver positions. Should the market correction, which began in the middle of 2020, continue, the widening differential between the value and the price of gold doesn’t mean a permanent loss: It actually makes buying gold (and silver) more attractive from the investor’s point of view.
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