Gold has continued to soar this week. Silver has soared even more.
I imagine that there are now two questions on the mind of the average investor reading this today.
Is gold in a bubble? If not, is there still time to get in on the act?
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No, gold’s not a bubble, and yes, there’s still time to buy
Dominic wrote about gold earlier this week, just as it was breaking through $2,000. Since then, it’s risen further.
So what comes next? As Dominic noted, we’ve seen some big-ish calls going about. Bank of America is probably the most noteworthy, with a call for $3,000 gold.
Also, the holdings in exchange-traded funds have surged. The biggest gold ETF in the world (SPDR Gold Shares) now holds more gold than several central banks, including the UK, although it still has a way to go to reach US levels.
This isn’t what you’d call a "stealth bull market" anymore. But are we into irrational exuberance territory? Not really.
For perspective, Adrian Ash over at BullionVault recently reminded me that in 2011, on the very day that the gold price hit its previous peak, he went on daytime telly to talk to Alan Titchmarsh of all people, about gold.
My view is that both gold and silver have further to go, as do the precious metals miners. I also suspect that platinum might have a decent bit of room to play “catch-up” from here.
Platinum lost out badly to palladium after it turned out in 2015 that diesel cars aren’t “green" at all (yet another example of the expert consensus turning on a sixpence without ever acknowledging their earlier errors – see also masks and butter).
Platinum is favoured for diesel catalytic convertors, whereas palladium is preferred for petrol ones. Hence palladium prices took off, while platinum languished. This hasn’t changed dramatically, although the scandal is now quite a while ago.
And make no mistake, platinum is still mainly an industrial metal – it’s certainly not a monetary one. However, it is a precious metal, still popular in jewellery. And this association with gold and silver via the precious metals complex, alongside a likely general pick-up in interest in commodities as a whole, suggests to me that investors, fearful of having missed out on the initial gold rush, will turn to platinum simply because it hasn’t moved up as quickly.
So there’s your short answers.
No, gold isn’t in a bubble, although you shouldn’t be surprised to see pullbacks after a big run-up like this (and unless you’re a day-trader, that shouldn’t really concern you). And yes, there is still time to get in on the bull market – gold might be at a record high but the nature of the rise so far suggests this is more like the middle act (and I’d bet on the early bit of the middle act) than anywhere near the end game.
A gentle reminder – you do have to take profits at some point
I do think it’s worth noting though that none of these assets – except gold, and even then only to an extent – are “buy and hold forever” shots.
Silver will do its thing, but if you own it with the intention of making money, rather than just enjoying having some physical silver (it’s pleasing to look at, etc), then you need to have a plan in place to ensure you take your profits at some point. Read Dominic’s most recent piece on silver to understand why you need to be wary of its volatility.
The gold miners are similar. They’re cyclical. Right now, I still think they could go a good bit higher – even if you do something as simple as looking at where many of them got to in 2011, it’s clear that there’s room to run (and gold prices were lower then and capital discipline far worse).
But at some point, you’ll want to cash in. Sitting on gold miners from 2011 to 2016 was not pleasant. There’s a difference between being a long-term investor, and being so stubbornly wedded to a viewpoint that it classifies as self-harm.
So have a plan. No, you don’t want to get shaken out of the bull market early, as that inspires hideous levels of regret – that’s how Isaac Newton, one of the smartest people in history, lost a big chunk of money in the South Sea bubble. Nor should you be trying to call the top every five minutes.
But do have some idea of what will make you decide to take profits. That could be a technical indicator – something that suggests the trend has changed, or a target price being reached. It could be a certain level of profit that you simply can’t bear to lose. It could be seeing gold on the cover of The Economist or on daytime telly. Whatever it is, have a plan.
As for gold itself – at MoneyWeek, we believe that you should always have a chunk of gold in your portfolio as a form of portfolio insurance and diversification. In effect, there should be a permanent allocation there of some level (we usually suggest between 5% and 10% depending on the individual).
But as the bull market continues, and the gold you hold starts to account for an increasing proportion of your asset allocation, you will also want to take some of those profits at some point.
The easiest way to do that is via rebalancing. As your gold allocation moves out of line with your desired allocation, then you sell some and move it elsewhere in your portfolio. In other words, if you want to have 7.5% of your portfolio in gold, say, and it goes up to 10%, you sell some to bring it back down.
Just to be clear – I very much agree with the old Jesse Livermore saying that you make most of your money in a bull market by just sitting still. If you’re already invested, keep calm and enjoy the rise. But also use this time to formulate a plan for the day that you decide to get up, get out, and crystallise your well-earned profits.
If you haven’t already, I’d suggest you subscribe to MoneyWeek, as this is something we’ll be discussing regularly over the coming months and years. Oh, and Dominic is writing about precious metals miners again this month, so you’ll want to read that for some potentially exciting ways to play the gold rush. Sign up now and you’ll get your first six issues free.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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