A Long-Term Look at Gold and Silver

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Long ago when I was first starting out in this business, a very wise man told me something I’ve never forgotten. It sounded strange to me at the time. But as the years have passed, I’ve learned to see its wisdom.

Most people in the investment advisory world think investors are too complacent, and that it is their job to jolt them out of their complacency by telling them that bad times are coming. In other words, their job is to scare them into action.

But this doesn’t really work. By the time people are scared into wanting to take action the move – the danger – is nearly over. (Or at least it is over for a long time.)

Instead, the best job an advisor can do is to try to calm hysteria and panic. I’m not saying that this is easy to do.

It is like being on a ship that looks in danger of crashing onto rocks. The passengers scream, lose hope, and call for the captain to “do something.” Meanwhile the best thing that can be done is to keep calm and arrange things to take advantage of any changes in opportunities – like having all possible sails unfurled and ready to take advantage of unexpected saving winds.

The people I’ve heard saying they want to get out of the dollar and into other currencies are like those panicked passengers. The time to be aware of the problem was much earlier, when they were complacent. But now, when the danger looks obvious, they should calm themselves, build up their cash holdings in the dollar, and be ready to take advantage of any opportunities that present themselves in the future.

This leads into a discussion on gold and silver. Many holders are very frustrated. They never expected that so many months after last May’s highs prices would still be so much lower.

Part of this is due to the relatively stronger dollar.

But mostly this is a very normal thing in a huge bull market. Even though most of today’s metals holders were not there at the beginning of the bull market in early 2001, the fact remains that a huge run-up over the five years that ended in May 2006 almost certainly has to be followed by a period of consolidation, correction, rest – whatever you want to call it.
To expect a bull market to simply rise without long periods of rest is just unrealistic.

How long will this rest period be? No one knows. I mentioned last May a target of one year. But I knew that it could easily be longer. During the huge bull market of the 1970s there was a three-year period that separated the first bull leg up from the second one. Each of these bull legs was huge. They took assets up by hundreds if not even thousands of percent.
But the period from roughly late 1974 to late 1977 saw corrections, dead markets, and very frustrated investors. By the end of this time, many had thrown in the towel. They missed the second huge bull leg that took silver, for example, from USD$4 to USD$50 in the next three years.

Will the correction that began in May last for three years as well? Will a new bull leg not begin until 2009? Of course, this is possible.

But more importantly, it is out of your control. The exact time is unknown. All you can do is to prepare yourself, accumulate, and hold ounces of metals, and then be patient.

For current income, have enough money in cash throwing off interest as you need.

This strategy, while simple, is not easy to follow. Investors (or rather those amateurs who call themselves investors) generally like to be active. They want and expect things to always happen “NOW.”

In this expectation, they are encouraged by the average broker or banker. These professionals don’t make much money off of you in commissions if you simply buy Treasury bills, gold, and silver and just hold them (rolling over the T-bills).

So be calm and patient. Don’t be frustrated. If you have profited from the huge rise in European currencies and metals from 2001 to last year, then recognise that this is a time for the markets to rest.

If you have come to the game more recently, this is a time to patiently accumulate ounces of gold, silver, and even platinum, while at the same time building up your stores of interest-bearing cash.

The best cash could well be in the U.S. dollar: The very currency that the average person is now panicked about. But panicked action never made for wealth. Instead, patient preparation and the ordering of your affairs to take advantage of any opportunity that presents itself – while at the same time compounding interest – that’s the ticket to wealth.

Good Investing,
Chris

Chris Weber
The Daily Reckoning Australia

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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Comments

  1. WHAT THE ???? sure how many U.S dollars are you going to buy? I am an average sort of person. But. I am not panicked about the U.S dollar. I am just a realist that can read. I can tell you that the U.S dollar is three parts of ????ed. Kind regards, Warren.

    Reply
  2. Perhaps the good captain should not be unfurling any sails. As this only places his vessel more at the mercy of the winds. Which most likely created his position of peril, in the first place. Maybe he should reef some sails and battern the hatches. Or in worst scenario, throwing out a kedging anchor and checking that his lifeboats are at hand and serviceable. Kind regards, Warren.

    Reply
  3. I fail to see how trading in currencies or build up a larger portfolio of over valued U.S. Dollars. Could lead one to debate concerns people may have regarding thier Gold stocks in whatever form. Anyone who is concerned about the price now in relation to last May. Is in my opinion ‘a greedy fool’. Who was most likely only bought into Gold to make a fast buck. For most I believe the positive aspects of owning Gold are evident when compared to the dwindling comparitive value of fiat currencies. Kind regards, Warren.

    Reply
  4. “Compounding interest is the ticket to wealth”? Sure. Lets see what the best return is that we can get for our money. Regardless of; the risk, the REAL inflation rate, the possible devaluation of selected currency, the goverments ability to produce infinetly more of what you have invested at the drop of a hat, or numerous other scenarios that can ONLY reduce. Not only your return, but the principle amount as well. All this while Millions are investing Trillions trying to do the same thing. Kind regards, Warren.

    Reply
  5. The ONE thing that the author has stated that I do agree with is, “accumulate ounces of gold, silver”. Not, however if you are overly concerned about your monthly percentage returns. Rather, that after some years your “ounce” will still be there. At such time. Your percentage of return, should be more than obvious. Kind regards, Warren.

    Reply
  6. a balanced portfolio in order to
    exploit unforeseeable opportunities.
    sounds like good advice.
    crapo durant would agree.*
    bill

    *who was crapo? heh-heh,you have to look him up, so you will remember.

    Reply

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