-- Posted Wednesday, 13 July 2011 | | Disqus

There is another section in Michael Maloney’s 2008 classic ‘Guide to Investing in Gold and Silver’ that is as relevant today as when this book was published and that is his analysis of the inverse relationship between gold prices and stocks and how understanding this can make you rich.

The basic premise is that whenever stock market are high you should cash out and buy gold, and whenever gold prices are high you should sell out and buy stocks.

Jumping cycles

Mr Maloney has an imaginary case study of somebody who does this starting in the 1930s and their relations carry on with the trading strategy and end up hugely rich. The comparison of returns with somebody who just stuck with the stock market or gold is absolutely staggering.

You can see how this would have worked in the past decade. Stock markets topped out in 2000 so you went into gold at around $250 an ounce. Stocks today are barely changed in a decade while the gold price is up 600 per cent.

Now you need to wait for the typical gold price spike to sell out at the top and then buy the Dow Jones index. In theory you should then be buying stocks cheaply for the next bull market while gold performs badly.

It is a beautiful cyclical investment model, though of course harder to implement in practice than in theory. You can mistime a top, for example, and lose out a lot on some of that miraculous compound growth.

However, it does explain how some hedge fund managers amass fortunes from correctly judging market cycles, albeit usually in a rather more short-term fashion. It also explains why some investors like Prince Alwaleed have only doubled their money in 15 years because sticking mainly with stocks has not been a good strategy.

Where are we now?

It is never too late to change strategy. The precious metals rally appears to have much further to go while stock markets could be facing another big fall.

That would position investors in gold and silver ready to make their trade out of precious metals and into stocks at the right point in the cycle – with precious metal prices high and stocks cheap. You might be able to make a similar cyclical jump into depressed real estate.

Mr Maloney is really making a clever observation on the potential upside in the precious metals market and showing how to leverage it up by switching asset classes at the right time. Yet if it was that easy why do so few investors do it?

-- Posted Wednesday, 13 July 2011 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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