-- Posted Thursday, 12 January 2012 | | Disqus
As we climb the wall of fear in this present gold and silver bull market, weak hands are constantly calling tops, even though the kettle has not really started to boil. GI Metals DMCC views that there will be no need to think about getting out of this particular asset class and into another more undervalued one, until two things occur.
Firstly, the general public needs to be getting into gold and silver en-masse, and secondly, the end-game of the current fiat/debt crisis needs to commence in truth: the end-game is the collapse of the world reserve currency. Although this has been occurring slowly over the last century, in order for there to be a mad rush into gold and silver driven by fear and greed, there must also be a pronounced loss of confidence in the American dollar. That is what will turn gold and silver from being the excellent hedge and cultivator of wealth it has been over the last decade to being virtually the only place to be; for a time.
When this period of great fear and greed occurs, it will be time for wise investors to consider moving a good portion of their wealth from gold and silver into other more undervalued asset classes. This article will discuss the strategy which we feel is best for precious metals holders to use in the coming months and years.
Successfully Riding the Precious Metals Secular Bull Market
Normally, secular (long term) bull markets follow similar patterns, even if the assets might differ. Able investors who study the fundamentals of a particular market and believe that it is undervalued are able to enter at a bull market's earliest stage, or what is termed the stealth phase. Riding out this lengthy stage requires patience, as it is characterized by a lack of volatility, upside or downside. A second stage leads on from this in which a greater percentage of investors and even a relatively small portion of the general public catch on to the importance and benefits of investing in a certain asset.
As this second stage develops, so does the volatility in price, just as we are experiencing in the current precious metals market. This second stage is called the awareness phase. As more and more people are attracted to gold and silver, a mania begins to develop. Although the bubble-calling pundits have been trying to claim that we have reached this stage many times, the bubble stage will not have been reached until a sufficient percentage of global wealth has been allocated to precious metals, and the masses are actually participating in the market. Eventually, we should be able to observe line-ups around the block outside precious metals stores, as occurred in the final stages of the 1980 bull market.
The fact that gold is beginning to be talked about at dinner parties does not mean that it has reached this final mania phase or that it is becoming a bubble. Most, if not all of those people talking about the rise in gold prices - if in fact they talk about it - have not actually gone out and purchased any. This is a well known phenomenon to those who have already committed themselves to buying gold and silver. Many of these investors cannot think of anyone they know who has actual physical exposure to gold and silver beyond jewelry and silverware. Clearly, the bubble-callers have it all wrong for gold, and even more so, for silver.
However, the mania phase is not that far off, and those who do not have physical exposure to precious metals should take advantage of the relative calm and comparatively low prices that still exist at this point. Currently, central banks across the world are actively buying up physical gold to hedge against the depreciation of fiat currencies and bonds. This is especially so for the emerging nations such as China and India. They clearly are aware of something that the general public has not caught on to yet.
As our world economy continues to deteriorate and the vulnerability of fiat currencies starts to become more obvious to all through higher rates of inflation, institutional investors and the general public are expected to start seeking physical exposure to gold and silver en masse, just as they have done before. This will be driven by three characteristics: Greed, fear and the need to hedge against rapidly rising inflation. Greed is a type of allure-based driver in this phase, whereas the fear that people will feel when they sense that collapse is imminent is based more on compulsion. Likewise, when inflation starts to rise so much that consumers are truly affected by inflation in their daily lives to the point that it becomes blatantly obvious to them and even painful, these people will be forced to put whatever wealth they have in real assets, particularly gold and silver. This will only be history repeating itself.
The Importance of a Sound Exit Strategy
At this point, it will become advisable to sell a significant portion of one's gold and silver portfolio during this mania phase for another asset that is still in its stealth or awareness stage. This is done in order to maximize the purchasing power of the metals being sold. However, it is not necessarily advisable to liquidate a gold or silver position completely.
A series of market indicators can be considered at that time such as the Dow to gold ratio (as it approaches a 1 to 1 ratio), as well as gold's actual value in purchasing power when buying other real assets such as a median priced home. Other economic and geo-political indicators will also be factors in helping analysts forecast the peak of this present bull market. However, since it is too difficult to be able to determine any market's apex, it is recommended to sell in stages once these indicators suggest that the mania phase is reaching its climax. This will be executed on both sides of the market's crest in order to maximize gains, as outlined in the following chart:
Hence, those who are presently talking about exiting the precious metals market do not truly understand its fundamentals, where and why it began, and where and why it will end. GI Metals DMCC holds that two key events need to take place before anyone should consider exiting these markets: the entry of your neighbours and their friends and cousins into the purchasing of physical gold and silver, and the clear and apparent loss of confidence in the world reserve currency.
Once these events begin to transpire, you should be listening closely to those analysts who you consider reliable and brought you into this market before the masses caught on. They will be examining the indicators mentioned in this article, and they will be the people who earned the right to be listened to in regards to your exit strategy. Most importantly, do not get caught up in the greed, and selling out early in the final stage of this bull market is superior to holding on too long and selling in the latter blow off stage.
http://www.myglobalinvestments.com/goldsilver/
-- Posted Thursday, 12 January 2012 | Digg This Article
| Source: GoldSeek.com
