Timing the Golden Rotation
On October 16th, a friend reached out to me via text.
He was considering selling part of his silver holdings:
At that moment, silver was priced at $54 per ounce.
I shared my strategy, which aligns exactly with what’s outlined here—to retain silver for the long haul. My main logic is that the Federal Reserve will inevitably resume large-scale money printing, which will bring inflation back.
Additionally, if I liquidate my holdings in gold, silver, and mining stocks, what alternatives would I shift my investments into? I explained all this to him and added that if he requires liquidity shortly, it could be wise to take some gains.
Silver fell to as low as $47 at the end of October but has since risen to $63.51.
Of course, the market could have moved in the opposite direction. Short-term price changes are notoriously difficult to forecast, which is why I keep most of my portfolio invested for the long term.
However, his question prompted me to reflect on the indicators that signal when the precious metals rally might be reaching its zenith.
Let’s explore this critical question in depth.
Debt & Deficit
A primary reason for holding precious metals and mining stocks is the unchecked government expenditure.
Until governments worldwide bring their fiscal matters under control, ongoing money creation will remain necessary to fund expenses and sustain economic activity.
We witnessed this during the pandemic when U.S. money supply surged by 41% between March 2020 and March 2022. This spike fueled inflation and helped spark the precious metals bull market.
On December 12th, the Federal Reserve started purchasing $40 billion in monthly T-bills, which represent short-term U.S. government debt.
This marks a clear return to money-printing policies.
Although not technically Quantitative Easing (QE)—which focuses on buying long-term bonds—the distinction is largely academic.
The gist is that demand for U.S. debt has waned, necessitating Fed intervention. Moreover, government financing increasingly relies on short-term debt instruments like T-bills and notes.
This shift stems from most buyers favoring shorter-term securities, as few investors are willing to commit to 30-year U.S. bonds given uncertainties about the dollar’s future value. While bonds can be sold before maturity, holding long-term bonds entails heightened risks (and rewards).
As long as governments fail to stabilize their finances, precious metals will remain a vital part of my investment portfolio.
The initial $40 billion monthly Fed buying appears to be just the beginning.
Gold:Silver Ratio
Currently, the gold:silver ratio (GSR) stands at 67:1, meaning gold costs 67 times more than silver per ounce—$4,321 for gold compared to $63.85 for silver.
During the 1971-1980 precious metals bull market’s peak, this ratio shrank to 17:1 ($850 gold and $50 silver).
Between 2000 and 2011, the GSR hovered around 30:1 ($1,500 gold and $50 silver).
At the end of these bull markets, silver typically experiences an extraordinary parabolic surge. Right now, silver prices are only $13 higher than during the 2011 and 1980 peaks, which is a minor spike rather than a major blow-off top.
Considering the substantial money printed since then along with rising demand, it’s clear this is not the moment for long-term holders to exit.
This cycle is far from complete. Though significant corrections will occur, I’m unlikely to attempt precise timing except to increase holdings during brief downturns.
Rotation Options
When deciding when to exit precious metals, a key factor is determining the destination of those funds.
Personally, I expect to transition into stocks at some point, possibly some bonds if yields rise enough and the situation worsens.
Gold and silver primarily serve as wealth preservation tools amid inflation. While their values often outpace inflation temporarily, that isn’t their core purpose for the long term.
For those of us with years to go before retirement, there will eventually be appropriate times to sell part of our gold and silver to acquire stocks.
However, right now, both equities and bonds are priced very high, suggesting it’s premature to divest from precious metals to move into traditional investments.
Bill Bonner provides exceptional insights on this subject. If you haven’t read his analyses on the Dow/Gold relationship, they’re highly recommended. The basic premise: when stocks are expensive relative to gold, it’s better to hold gold; when stocks are cheap, you sell gold and buy stocks.
Bill has explored this concept for many years. This article is a great introduction. You can also browse the Daily Reckoning archives to find Bill’s warnings about costly stocks and undervalued gold back in 2005, shortly before the market crash, when gold traded around $430 per ounce.
Close Enough
Perfectly timing the golden rotation is a near impossibility. However, if we can get within roughly 25% of the market top, that will suffice. Perhaps we’ll do better, but it’s wise not to rely on that.
I anticipate the precious metals peak won’t arrive for at least another five years, potentially even longer.
Governments globally are struggling financially. Wastefulness, fraud, corruption, and rampant money printing are escalating. Debt continues to pile up, especially in the U.S., the issuer of the world’s reserve currency.
U.S. stocks and bonds currently trade at extremely high valuations.
Given this situation, maintaining a solid portion of alternative assets is prudent. By now, you’re familiar with my advice. That includes gold, silver, mining stocks, and affordable emerging markets rich in natural resources such as Brazil. While I hold U.S. stocks as well, they’re mainly contained within retirement accounts that have limited flexibility.
Additionally, I have significant venture capital investments, mostly in American firms.
Thus, I retain considerable exposure to the U.S. economy—more than I would ideally prefer. But given its strong performance over the past 15 years, it’s understandable. The key takeaway is that during times like these, diversification into alternatives is essential.
Even when the moment arrives to sell some precious metals in favor of stocks, I plan to keep a meaningful allocation. As Jim Rickards aptly puts it, gold is the “everything hedge.” Owning some will always remain worthwhile.
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