Timing the Golden Rotation

Back on October 16th, I got a text from a friend.

He was thinking about selling some of his silver:

At the time, silver was trading at $54/oz.

I told him my plan, which is exactly what has been written here. And that is to hold for years to come. My basic reasoning is that the Fed would eventually have to start printing gobs of money again, and inflation would return.

Plus, if I sell gold, silver, and miners, what am I going to switch into? So I told him all that, and added that if he needs the cash in the very near future, it might make sense to take some profits.

Silver dipped as low as $47 in late October, but has since rebounded to $63.51.

Of course, it could have gone the other way. Short-term moves are extremely hard to predict. Which is why most of my portfolio is held long-term.

But his question got me thinking. What are the signals that will tell us when the precious metals bull market is nearing a peak?

Let’s dive into this important question.

Debt & Deficit

The most obvious reason to own precious metals and miners is out-of-control government spending.

Until global governments get their houses in order, money printing will be required to help pay the bills and keep the economy alive.

We saw this clearly during the pandemic, when U.S. money supply jumped 41% in just 2 years from March 2020 to March 2022. Inflation jumped as a result, helping launch the precious metals bull market.

On December 12th the Federal Reserve began $40 billion of monthly T-bill purchases. T-bills are short-term U.S. govt debt.

We’re officially back in money-printing mode.

This is not technically Quantitative Easing (QE), because QE buys long-dated bonds, but the difference is academic.

The bottom line is that people aren’t buying enough U.S. debt, so the Fed needed to step in. Besides, the government has largely switched to financing itself using short-term debt (t-bills and notes).

That’s because the vast majority of demand today is for short-term securities. Not many people are brave enough to hold 30 year American bonds. Who knows what the dollar will be worth in 30 years? You could sell the bonds before then, of course, but the risks (and potential rewards) are exaggerated with long-term bonds.

Until global governments begin to get their finances in order, there will be a place for precious metals in my portfolio.

This initial $40B/month Fed buying is a warmup for what’s coming.

Gold:Silver Ratio

The gold:silver ratio (GSR) is currently 67:1 (meaning gold costs 64 times more than silver per ounce – $4,321 gold and $63.85 silver).

During the peak of the 1971-1980 precious metals bull market, that ratio reached 17:1 ($850 gold and $50 silver).

From 2000-2011, the GSR reached approximately 30:1 ($1,500 gold, $50 silver).

At the end of precious metals bull markets, silver almost always makes an incredible, ridiculous parabolic move. Right now we’re only $13 over the 2011 and 1980 highs. That’s no blow-off top, that’s a blip.

And considering how much money has been printed since then, and how demand has grown, it’s clear to me this is not the time for long-term investors to sell.

This cycle isn’t over. Not even close. Sure, there will be big corrections along the way, but I probably won’t be attempting to time them, unless it’s to add to positions during mini-crashes.

Rotation Options

When thinking about when to sell your precious metals, one of the most important things to consider is what you want to switch into.

Personally, I will probably be looking to swap into stocks when the time comes. Maybe some bonds too if things get bad enough and yields get high enough.

Gold and silver are tools to preserve wealth during inflationary times. Sure, they might grow in value more than inflation for a while, but that’s not really their long-term job.

Eventually, for those of us with a while left until retirement at least, there will come a time to sell some gold and silver to buy stocks.

But today stocks and bonds are incredibly expensive. This tells me it’s not time to think about selling precious metal investments for traditional assets yet.

Bill Bonner does excellent work on this topic. If you’ve never read his Dow/Gold pieces, you’re in for a treat. The theory is simple – when stocks are expensive vs gold, you want to own gold. When they’re cheap, you sell some gold and buy stocks.

Bill has written about this theory for decades. This article is a good place to start. You can also search through the Daily Reckoning archives and find Bill warning about expensive stocks and cheap gold in 2005, not long before the big crash, and when gold was trading at $430/oz.

Close Enough

Timing the golden rotation perfectly is impossible. But if we can get within 25% or so of the top, that will be good enough. Maybe we’ll do better, but let’s not count on it.

I don’t expect that top in precious metals to arrive for at least 5 years. And probably longer.

Governments around the world are in sorry shape. Waste, fraud, corruption, and money printing are rampant and growing. Debt is stacking up, particularly here in America, home to the world’s reserve currency.

U.S. stocks are at nose-bleed valuations, and bonds are too.

So this current environment calls for a healthy allocation to alternative investments. You guys already know my spiel by this point. Gold, silver, miners, and cheap emerging markets with lots of natural resources, like Brazil. As I’ve mentioned multiple times, there are U.S. stocks in my portfolio. But that’s mostly in retirement accounts where options are lacking.

I should also mention that I own a fair amount of venture capital investments, of which the vast majority are American companies.

So there’s still plenty of exposure to the U.S. economy. More than I’d like to be honest. But hey, it’s done well over the past 15 years. My point is that during times like this, you want a healthy allocation to alternative assets.

Even when the time comes to sell some precious metals for stocks, I’ll keep a decent allocation. As our friend Jim Rickards says, gold is the “everything hedge”. And it’ll always be worth owning some of that.