Riding the dow-to-gold cycle to great riches
Posted on 11 July 2011 with 8 comments from readers
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?
8 Comments posted by readers:
“Yet, if it was that easy, why do so few investors do it?” There must be a clutch of reasons and people will put a different level of importance on each one.
One reason is that investors don’t realise that they DON’T have to take delivery of the precious metals they have purchased. Indeed, you can do the whole lot on the internet. I have been with GoldMoney.com for some years now and what I buy is stored for me in a secure vault in London, which is miles and miles away from where I live.
Second reason is, for me, that investors don’t realise that they can sell their bullion at a click of a computer mouse button. It’s SO easy!
Third reason is that investors are deluded into believing that if you don’t get a dividend from your investment, you are not profiting. This is absurd as Ed. has pointed out previously. If your silver investment has gone up by 500% and your gold by 450% in the last decade but your shares have given you increased value of just 96% of what you bought them at a decade ago, who cares about dividends?
Fourth reason is that private investors don’t appreciate that they can do ALL their bullion investing by themselves without any professional input or advice. Just invest your money in bullion through an internet dealer, watch the spot prices through the week and read experts you trust, like Peter Cooper, on the internet.
Any other reasons why so few investors do it?
It’s a pity that Mr Maloney says “you should cash out and buy gold” when, in fact, he means bullion. After all, he reckons that silver might be worth more than gold in the future.
Or write “buy silver and gold” instead of just “buy gold”. After all, it’s becoming increasingly clear that gold does NOT represent silver because silver, currently artificially repressed in price, will later have a different trajectory upwards compared to gold.
close-minded non-pragmatic people buy corp. stocks out of convention, still remembering the bull market ‘80-’00…..i know many people who think like this…..they tell me they’re conservative……i say they’re reckless.
A$..love this..i frist praise Mich Maloney, a vault of knowledge & acumen in these matters..and Peter, your condensation of Maloney’s wisdom is next up – brilliant..
the two flies in the ointment against prospering w/ this info are Time & the ongoing financial machinations of the Elite..if you struggle versus these realities, you are in the minor leagues..no one can return to 1930 to start an investment cycle..
i can’t get back even to 1980, let alone 2000..that leaves me “short cycle”..last, the next cash out of gold cycle may be in times so turbulent that the Dow has ceased to exist, indicating local real estate as option..if the thought makes you shy,
consider retaining a portion of your gold secured @ home – i use the word turbulence to indicate zero access to vault storage
Funny how silver reached £23 per oz yesterday and then, suddenly, dropped back to £22.35 or so today, whilst gold has continued rising above £31 per gram, which is its highest yet.
There was a force pushing silver and gold up yesterday. Today there is a force pulling the silver price down whilst yesterday’s force pushing the gold price up continues unchanged.
Evidence, to my mind, of someone selling silver into the market from their vaults. They must surely run out of silver soon. With vaults empty of silver to manipulate the silver market down, the price will soar.
What to see what one smart fellow predicts will happen if the US Congress doesn’t raise the debt ceiling by August 2? Read Robert Powell’s, ‘No Debt- Limit Deal? Your Investments Plummet’ at http://www.marketwatch.com Scary. If they don’t act, investors will be will stuck on the investment Titanic. Former Congressman Dick Armey just said that they will raise it. It looks like investors had better hope he is right.
@ John Mark:
Yes, there is a very strong force that’s pushing the silver price back down, whenever it shows strength. But I strongly doubt that your remark “Evidence, to my mind, of someone selling silver into the market from their vaults.” represents what is truly happening.
Who Would Use Physical Silver to Drive the Price Down Hard?
In order to drive the silver market down hard (e.g. like yesterday) by using physical silver, it would require an large institution with large amounts of physical silver to sell into the market; yet those who hold large amounts of silver as an investment (e.g. Sprott Asset Management) would not sell it. The other entity that has a large amount of physical silver is the ETF SLV, which is managed by JPM and BlackRock, and there is no doubt that JPM wants that physical silver for themselves, and not as collateral for the ETF itself.
Paper Silver is not Silver:
The easiest way to drive the silver price down hard would be for the big “investment banks (e.g. JPM, GS, etc.) to sell “paper silver” into the silver futures market. This is what they do almost every trading day. As TheOldMan and others here have stated several times, the COMEX is not the place where true silver price discovery exists; it’s the place where paper silver is traded for other paper. So when JPM engineers the silver “takedowns”, they are able to withdraw large amounts of physical silver from the ETF.
obewon, thank you for going to the trouble of explaining in detail for my benefit. I know that I’ve still not got the hang of this yet.
I know that JPM+ have a capacity to lower the price of silver. I also know that this price-lowering capacity is limited and can, therefore, cease, at some point in time, to alter silver’s price. Ed. confirmed this to me in one of his notes.
Now, I can understand this capacity in terms of selling physical silver into the market, thus lowering prices, and of ceasing to be able to go on doing this ad infinitum because the vault becomes emptied of silver.
But ETFs are not physical silver so that, whereas silver cannot be produced by JPM+, ETFs can – by printing them rather like Bernanke prints or increases the money supply digitally.
I would be grateful, therefore, if you would explain to me, for I get lost within the world of ETFs, why it is that JPM+’s price-lowering capacity does not go on for ever and ever. Yet, Ed. has said that this capacity is finite.
If ETFs can be produced digitally or on paper and not dug out of the ground, what is stopping JPM+ holding down the price of silver for ever and for ever?
Looking forward to your explanation.