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What is the Gold Market Trying to Tell Us?

Regular readers of this blog may or may not know that I follow the gold market fairly closely.  I am not a gold bug per se, but I do feel that gold is a decent store of wealth as opposed to the greatest investment as some would have you believe.  On the other hand, I don’t think that it should be dismissed entirely since it can have some purpose in a broad investment portfolio.

If you have been watching the gold market recently, you have probably noticed that the price has dipped below $1600 per ounce.  The gold market has historically been one that has been responsive to inflation expectations due to money supply or geopolitical concerns or even financial crises and a loss of confidence in fiat currency.

But with the gold price having backed off from a high of over $1900 per ounce last August and September, is there something that we should be expecting?

Global Industrial Slowdown?

Here is a recently published article that suggests gold is correlated with global industrial production.  That would seem to make sense as inflation, while technically a monetary phenomenon, seems to respond as a result of increased demand as well.  When the labor pool is tight, wages increase leading to a broad increase in prices.  Likewise, when the cost of oil and transportation and all the other goods that use oil in production increases, the gold market seems to respond to those inflation expectations.

If this is the case, one has to wonder whether the gold market is foretelling some global economic slowdown.  Is there another recession on the horizon?  Is China slowing down and are concerns about growth coming from that area of the world?  Is Europe really going to become a major headache?

On the other hand, is it simply the fact that there is no sign of inflation in the near future and that growth will continue albeit at a more moderate pace?  Is this simply a period of consolidation in the gold market?

There is a seasonality to the gold price and summer tends to be a slow time in regards to the price.  Is this a factor in the current pull back?  Will the price for an ounce of gold make another strong run in the fall?

To be perfectly honest, I really don’t have a clue.  So, what am I doing with this information?

Buying More Silver Wheaton Stock

I am buying more Silver Wheaton stock.  Silver typically follows the gold price although with some added volatility.  This has provided me a decent opportunity to purchase some more SLW which should make a nice rebound should seasonal factors be playing a role or should global economic activity improve.

I have already increased my share count by 6.5% this past month and am looking to add some more when I sell some calls and collect the premium.  Hopefully, I will have enough cash to do this during June.  I should be collecting some dividends from Seadrill and AK Steel during the month of June so that should help with the needed cash.

The key will be to maintain patience and add to positions when the stocks are down and pare back when they spike.  I plan on using the same technique with Silver Wheaton and by extension, the price of gold and silver.

What do you think is happening with the gold market?



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8 comments - What do you think?  Posted by Cash Flow Mantra - May 11, 2012 at 12:33 pm

Categories: Investing   Tags: , , , , , , , , ,

My Thoughts on Investing in Gold and Silver

I was asked a few weeks back on my thoughts regarding investing in gold, and I am finally pleased to say that I am able to sit down and write a post about it.  But, if you are as busy as I am and don’t want to read a full post, I can sum up my thoughts in a single sentence:  “Every portfolio should have some exposure to gold because the dollar isn’t getting any stronger.”

However, I am sure that those of you with the time would like me to elaborate further so I will do just that.  But first I want to make sure that we are all on the same page to know what gold really is.

What Gold Is…

Simply put, gold is a store of value and a medium of exchange.  There are few things that have been around for 5,000 years but gold is one of them.  So are real estate, crops, and livestock as well as people.  Google stock hasn’t been around that long.  Bonds haven’t been around that long, although some borrowing and lending has been going on but settlement of debts would have been in gold or livestock, etc.  The dollar or euro or yen or any other paper currency hasn’t been around as long, either.

You can claim all you want that gold is a barbaric relic.  But just because the fact that gold has value is unexplainable or doesn’t make sense, doesn’t mean it isn’t true.  I can’t explain it either, but the fact is that it has for most of recorded human history would suggest that it won’t be changing in the next few years.  I might even be tempted to agree with those who would suggest that gold really shouldn’t be worth anything, but I can’t fight the facts.  So I tend to go with my observations rather than my bias.

Why Own Gold?

Well for starters, it is a store of value.  I know that at some point in the future, I will be able to trade my gold for dollars (or whatever the currency of the realm happens to be at the time) and use it to get the stuff I need like food, clothing, or shelter.  It may not be the only thing that is useful for bartering, but it is a lot easier to haul around than a cow.

Now there is nothing wrong with keeping a little bottled water or canned food around or ammunition.  But I don’t know that I would be using those items for bartering.  I would be consuming those items.  Personally, I don’t think that the world will come to this, so this isn’t one of the main reasons that I own gold.

Another reason to own gold, is to decrease the volatility of an investment portfolio.  Stocks haven’t gone very far over the last decade and yet gold has increased in value by over 6 times!  The best “investment” I have made over the past decade has been gold, silver, and GoldCorp stock.

This is the main reason that I started investing in gold in the first place.  I studied Kondratiev and his K-waves and looked at the trajectory that the weak dollar policy would take.  Knowing that gold would do well in such an environment caused me to invest in gold, silver, and gold mining stocks.

But What About the Gold Bubble?

I can honestly say that I hope gold is in a bubble right now.  Why?  Because then my other stock investments would do well.  My dollar would purchase a lot more gasoline and imports would decrease in price.  If gold is in a bubble, then the price should be collapsing at any time and the purchasing power of every dollar I earn should double or triple.

Somehow, I don’t see that happening.  In fact historically, gold has done well when real interest rates are negative.  This means that interest rates are less than the level of inflation which makes for a loss of purchasing power of paper currency.  It only makes sense that gold would do well since it serves as a store of value.  What is the point of saving in CDs if you lose to inflation year in and year out?

Since the economy sucks and Ben Bernanke has said that he doesn’t expect to increase interest rates for some time, I think gold will continue to do well.  Does that mean that I think you should go all in?  Of course not.  The time to do that was in 2001-2003.  That boat has sailed on.  But I don’t think that it wouldn’t be prudent to place a little bit of your portfolio into gold.  Of course, the higher the price goes, the closer it is to a top.  But I don’t know where that would be.  No one does.


I think having some exposure to the gold price (about 5-15%) in an investment portfolio is a good idea and one that will help decrease volatility.  I think investors should become aware of the longer term trends by studying long waves and should look into getting into stocks or real estate when everyone is down on them.  I also think the loudest opponents of gold are simply miffed that they missed the historic opportunity that was presented in the early 2000’s.  Of course, keep yelling bubble long enough and eventually you will be right.  I will be looking at the Dow:gold ratio and interest rates to make my assessments.

Readers:  I am sure you have some thoughts on investing in gold.  I have read several posts on the topic.  Please share your thoughts.  I would love a spirited discussion.  Maybe future post topics will emerge.

PS–It’s kind of nice to be writing this post on a day that gold is up over $58 per ounce.

22 comments - What do you think?  Posted by Cash Flow Mantra - September 3, 2011 at 6:00 am

Categories: Saving, Investing   Tags: , , , , , ,

Protective Puts Saved Me Nine Percent in a Volatile Stock Market

There has been a lot of volatility, fear and uncertainty in the stock market recently.  Personally, I don’t think that there will be any changes in the near future and that the volatility will continue.  I am still suspecting another recession in the next 12 months and a return of the Dow to 4 digits.  Of course, I could be wrong but why take any chances?  I will keep using protective puts on my retirement accounts.  After all, they just saved me 9 percent of my portfolio.  I am down about 4% since the downgrade.

Today is option expiration so those stocks that closed below the level of my puts yesterday will automatically be sold.  I haven’t cared much that Akamai (AKAM) traded below $21 per share since I have puts that will be exercised at $27.  They will sell today at $27 and I will have $6 per share extra in cash when I buy back on Monday.  I will likely just sit on my current positions and wait for the carnage to end and a trend to re-establish.  Then I can buy more shares with the cash that I have.

Avoiding Big Losses

I have become convinced that the best way to make money is to not lose big.  Swinging for the fences makes for good stories, but winning is often times more about not making any forced errors.  It is avoiding turnovers and protecting the ball.  It is about controlling the game and not giving up a big play.

The same holds true for investing.  I don’t want to lose 50% because it takes a 100% gain just to get back to even.  I would much prefer to lose only 10% even if I have to give up a little bit of upside during bull markets.  That is why I started using protective puts in 2007.

The timing couldn’t have been better since when the market was down big, I lost only 18%.  It didn’t take long for me to get back to where I was before.  You don’t necessarily have to use options to control your risk, but you should have a plan when investing whether it is “sell in May and go away” or dollar cost averaging or asset allocation.

For me, put options make the most sense.  I have been trading options for over 10 years and have a good sense of how to use them.  I have been sharing my trades on two of my stocks, SLW and ONXX, over at OptionsDude.com to give readers an idea of how I have been trading in my retirement.  I actually thought my put options for both of these stocks would be exercised, but was surprised over the past week.  The price of silver soared on Friday (and Silver Wheaton stock with it) such that I actually had one ray of sunshine in my portfolio.

This is a little shorter post than usual, but I wanted to share a little about how I am dealing with the volatility in the stock market especially now that options have expired, and results are in.  I have been able to sit back and watch what is happening rather than worry too much about it.

Readers:  What are your thoughts on recent market volatility?  How have you been handling it?  What are your plans going into the rest of the year?



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22 comments - What do you think?  Posted by Cash Flow Mantra - August 20, 2011 at 11:09 am

Categories: Investing   Tags: , , , , , , , ,

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