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October 11, 2005

The Time Horizons of Gold Investment
by Roland Watson

Investors come in many classes. At one end of the spectrum we have the day traders who can enter and exit a position within a matter of hours. Indeed, the brief time that such people hold their positions has led some to question whether they qualify for the title "investor" at all and prefer some other form of address such as "speculator" or "trader". The same could be suggested of futures and options traders who never actually hold the asset underlying the derivative, but are merely in it for the short-term profit regardless of the company's long-term prospects.

Meanwhile, at the other end are the "buy and hold" investors. They see an undervalued asset, buy it and then hold onto it for years if not decades. Included in their ranks would be those with an interest in their company pension scheme or (certainly in the past) those who bought their company's shares at a discount and held on until retirement in an age when "jobs for life" really meant life. I could also add here the "buy and die" investors who buy the asset but for some reason never liquidate their position and eventually go to the grave bequeathing the assets to someone else.

So it is with gold and silver. First there are those with time-horizons of days and weeks. Daily, thousands of positions are rapidly entered and exited on the derivatives markets as the longs and the shorts battle for price supremacy. This is a paper market that cares not for the long-term fundamentals of the metals; it is all about riding out short-term price movements or hedging against the unexpected - whatever the fundamentals may be saying. These people tend to be pre-occupied with technical analysis, snap pieces of news or actuarial risk.

Moving our time-horizon out to months and a few years are the dollar pessimists who see the US dollar as being in a medium to long-term bear market. That market is currently in its third or fourth year depending on when you think the bear started to growl. I personally believe that the US dollar has not finished dropping against its competing currencies - including gold and silver. I see at least one more leg down which could take it's index down to an unheard of 50-60 range. Within that time window of dollar depreciation, gold and silver could easily go beyond $800 and $20 respectively.

When that point in time is reached, investors will have to answer an important question. What kind of time-frame investor am I? They would have entered a possibly substantial gold and silver position in recent years and they have to ask whether they are ready to exit and take the profits or extend their time-horizon even further.

This is no easy task. How many held out in late 1979 or early 1980 when they should have got out? They had extended their time-horizons, but the choice was wrong because the fundamentals did not support the decision. To put it in a nutshell, the longer your time-horizon, the more important fundamentals become.

When the dollar bear market ends (as all bear markets do), it will be like 1979-1980 again for many investors. They got on at $300 gold; do they get off at $800 gold? Is there more to come or do they take the money and run? At that time fear and greed will become conflicting emotions. Perhaps the decision will be easy for some; they will be retired or they will have debts to settle, but for others who hold the metals as a large part of their portfolios, the temptation to hold on for higher profits may be too much.

So, what would our dollar bear horizon of a few years stretch into? The next time horizon is Peak Oil and the collapse/stressing of the fiat money system. This is the decade of the dollar bear but next decade will be the decade of the energy-fiat bear. What do you do? Do you decide to switch time horizons and hold on into the next decade? With the prospect of gold going onto $3000 an ounce and silver to $100 an ounce in the next decade, you decide to hold on since your general finances are in good shape and you regard your metal commitment as risk capital.

However, first you have to deal with the emotion of the correction of gold and silver prices after the dollar bear has ended. This may take a couple of years before the next great bull commences. Of course, you may be wise enough to get out of gold at $800 in 2009 and get back on at $550 in 2011 (these numbers are of course used for illustration only). All I can say is good luck to you, better men have tried and failed!

Whatever your entry-exit strategy, you have now ridden the multi-decade gold-silver bull and we now approach the end of the second decade of this century. The energy-fiat crash is due to stabilise somewhat as gold and silver begin to play a major role in money again and energy conservation and alternatives begin to kick in. Can you handle a correction of gold down to $2000 from $3000 or whatever a new gold or pseudo-gold standard sets it at? You need to decide whether now is a good time to once again exit gold-silver for paper money. Or perhaps you want to expand your time-horizon one more time?

By now, you are getting on in years and we are into the third decade around 2020 onwards. You may have got into gold in 2003 aged 30 years old. You are now over 50 years old. The final time-horizon is the depletion of natural gold and silver reserves as the metals are finally mined to exhaustion. When this time horizon ends, gold will be approaching $10,000 and silver will be north of $700.

You look back at those who traded in and out over weeks 30 years ago, you look at those who got out when the dollar bear ended 20 years ago and you look back at those who got out just before gold was remonetized 10 years ago. You have lived this long and probably seen a few amazing things on the way. The gold you hold has not tarnished nor grown old like you - it is gold and it does not fade. You have reached the pinnacle of the great multi-decade bull market in gold and silver and survey the vista before you. You feel as if you have ascended Mount Everest whilst others have contented themselves with scaling lower heights of 5,000, 10,000 or perhaps 15,000 feet.

You now realise that those coins have been your companions throughout life. Well, they have come this far; perhaps you will let them stay with you to the end. If that is your choice, you have now stretched your time-horizon to eternity and become one of the "buy and die" brigade. You have become more concerned with invisible streets paved with gold rather than visible coins struck in gold.

Congratulations on ascending the mount and seeing all before you, for there will not be many reading this today who will achieve that mighty climb!

Whatever your golden time-horizon is, we wish you good investing.

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here" link to the right.

Comments are invited by emailing the author at newerainvestor@yahoo.co.uk

Roland Watson
http://silveranalyst.blogspot.com

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