When the Gold Bull Market Ends

The recent spike rally in silver and subsequent collapse have got me thinking about the future of precious metals. Events can change so quickly based on just a couple of variables. The best course of action, as always, is to be flexible and adjust accordingly.   

I believe gold will go from an underowned to overowned condition fairly quickly. The two main things I will focus on are price and time. I have price targets, but I don’t get married to them. The problem with price targets is that people forget that they are just estimates. As a price target becomes more of a reality, people tend to think that hitting the price target is a foregone conclusion.  This is obviously not true, and if anything, price targets do more harm than good if you aren’t careful.

A good example of the danger of price targets comes from the recent rally in silver. There were a lot of people who knew the rally in silver was overextended but held on because they decided long ago they would unload between $50 (the nominal all-time high in silver) and $60. Well silver just barely missed hitting $50, and most of these people didn’t unload. They focused way too much on price without accounting for time. If silver ran up to $50 in 2 years as opposed to 7 months, I would probably be leading the charge in silver. But because silver ran up so fast, I was hesitant to press silver on the long side.

The Marathon Runner

When thinking of price as a function of time, think of a runner. Most people claim to be “long-term” investors, so the appropriate analogy is the marathon runner. If the goal is completing a race, who would you bet on, the slow and steady runner, or the runner who is sprinting out of the gate? The latter may be more impressive and garner all the headlines in the short-run, but in the long run, we all know he’s setting himself up for a collapse. It is the slow and steady runner that’s going at a sustainable pace.

Most people understand the aforementioned concept intuitively, but so few can actually act on it. This is pretty fascinating to me. Knowledge is useless if you can’t put it into practice. How many doctors would you trust who understand the human body inside and out, but never successfully performed surgery in their life? This is the point I always try to make about “experts” like Helicopter Ben Bernanke. He has attained great learning and fancy credentials, but he has no idea how an economy works in practice. For all intents and purposes, his knowledge is useless.

Anyway, when I think about gold and silver, I try to apply all the knowledge I have. If gold were to double in 2 weeks, I’m getting the heck out. If all my friends and acquaintances start touting gold to me as a hedge against inflation, I’m running for my life. If gold is “guaranteed’ to go 20% higher, I’ll let others pay to find out. When Helicopter Ben recommends buying gold, the bull market will have officially ended. There are certain things to look for at the tail end of a bull market. The people who will make will make the most money from gold will not necessarily have the most knowledge, they will have the right temperament. This is what you should focus on improving.

When the Gold Bull Market Ends is a post from: Expected Returns

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