Why holding precious metals into a market sell-off can make sense

It may be counter-intuitive but holding on to precious metals into the growing sell-off in financial markets could still make sense for many investors. Becoming a trader and hoping to cash out now and buy back later at lower prices is all very well in theory but may turn out badly in practice.

The biggest risk for the non-professional trader is not that prices will suddenly shift higher after you have sold, but rather that you will be too cautious about buying back, and that markets could move very quickly to the upside.

Jim Sinclair

If that scenario follows – and it is one highlighted recently by gold bug Jim Sinclair who correctly forecast the current gold price a decade ago – then an investor who sells out now is left holding cash at a point when gold prices might well take off to the moon. Mr Sinclair sees gold going to over $12,500 an ounce (click here).

Buy-and-hold is a strategy that has made more serious investment fortunes than manic trading which at its worst is nothing more or less than casino-style gambling. Investment timing is seldom easy, so why do it if you know the long-term direction of an asset class?

This is why housing is such a good investment for many people. Because they live or let their property people do not attempt to duck in and out of ownership but stick with it through the ups and downs of the cycle. People are reluctant to sell when house prices are low and do not rush to sell when prices are high.

But there is a particular reason for being confident that any downturn in gold and silver prices will be short-term this time. The global money supply expansion is out of control and such an inflationary outlook always favors precious metals as a money with a fixed supply unless interest rates are raised above inflation.

So if assets like stocks, real estate and then bonds are sold off where does the money go? It will be converted into precious metals, and that in flow could come very suddenly and catch those who have sold their gold and silver off-guard. The ArabianMoney newsletter offers several strategies for maximum gain in this investment bubble (sign-up here).

Indian summer

To give a more convincing recent example. Last summer it looked as if gold and silver prices had recovered nicely from their sell-off in the global financial crisis. Some thought a stock market correction in the autumn would dish precious metal prices and sold them.

However, as it was along came QE2 money printing and precious metals lifted off. Silver has more than doubled since then, even allowing for its recent correction, and gold is up more than 30 per cent. Mr Sinclair thinks QE3 is just as inevitable and so does investment guru Dr Marc Faber.

No other asset class delivered that performance in that time frame, except perhaps for milk. But you might have missed it by dumping gold and silver last summer and waiting for a stock market correction. This year you should avoid making this error as the snap back in precious metals could be very fast, and of course the presumed sell-off may not happen.