How to select which metal to buy and sell

benjamen

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Disclaimer:
I have posted this elsewhere on the internet, so some of you may have already seen this. The numbers in the examples are as of the end of January, but still apply as an illustration.

Assumptions:
1) Precious metals are not an investment; They are a store of value.
2) When the money supply increases, there is inflation
http://www.shadowstats.com/article/money-supply
3) During periods of inflation, the price of precious metals increase (on average) relative to the local paper currency.

Theory:
During times when the money supply is increasing, store wealth in precious metals

Problem:
If someone is going to store their wealth in precious metals, which one?
Should you diversify by storing your wealth across multiple types of precious metals?

My solution:
1) Diversify across Gold, Silver, Platinum, and Palladium
2) Each time I wish to convert more wealth to precious metals, use my analysis to determine which one is currently undervalued relative to the other three.
3) Each time I have need of paper currency, use my analysis to determine which one is currenly overvalued relative to the other three.

Analysis:

Data
Since many investment sites do not always have all the data I want, I created my own data tables. Every weekday, at lunch time eastern time, I record the spot prices of gold(G), silver(S), platinum(PL), and palladium(PA). The data table I use for my analysis covers 01/02/03 - current day.

Number crunching method one
I calculate the 200 day moving average (200DMA).
I divide the current spot price by the 200DMA.
Equation: Spot/200DMA
This allows for an easy comparison versus the local paper currency.
Similar to the method used in the link below, I value this answer like this:
1.1+ overvalued
0.95-1.1 average value
0.85-0.95 undervalued
0-0.85 very undervalued
http://www.runtogold.com/metal-prices/

Number crunching method two
I create six ratios by dividing one PM spot price by another:
PL/G, PL/S, PL/PA, G/S, G/PA, PA/S
Next, I calculate the 200DMA of each of these ratios.
Third, I compare todays ratios to their respective 200DMA.
Equation used: absolute value[1-(spot/200DMA)]
This allows to easily see which metal is undervalued compared to the other three metals.

Number crunching method three
Similar to the previous method, I consider the same six ratios.
However, this time I calculate the long term average and standard deviation.
Using these values, I calculate how many standard deviations the current ratio is from the long term average.
Equation: absolute value[(average-spot)/standard deviation]
This method gives a longer term view of the relative value of the four precious metals.

Current Analysis:
Using method one, I calculate the following numbers:
Gold: 1.077
Silver: 0.932
Platinum: 0.944
Palladium: 0.952
This method shows Gold to the metal to sell if paper curreny is required, while Silver would be the metal to purchase if more wealth storage is desired.

Using method two, I find:
PL/G: 13%
PL/S: 0.7%
PL/PA: 1.1%
G/S: 14.1%
G/PA: 11.7%
PA/S: 1.6%
This method shows the ratios between Gold and each of the other three metals to be over 10% removed from the average. This confirms the view of the first method that showed Gold to the most overvalued.

Using method three, I find:
PL/G: 2.00 deviations
PL/S: 1.97
PL/PA: 1.77
G/S: 0.83
G/PA: 0.32
PA/S: 0.95
Interesting, this method actually reflects Platinum to highly undervalued from a long term perspective. Since it is much rarer, Platinum usually trades for much higher than Gold, which is not currently the case.

Conclusion (as of the end of January):
Silver and Platinum is undervalued
Palladium is at average value
Gold is overvalued
 

pmbug

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Only possible issue I see is that your system is based upon the spot/futures market and it may not accurately reflect premiums in the physical market. I understand that data for physical market prices isn't readily available for a similar analysis, but the premiums over spot could be a significant factor when comparing.
 

benjamen

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Only possible issue I see is that your system is based upon the spot/futures market and it may not accurately reflect premiums in the physical market. I understand that data for physical market prices isn't readily available for a similar analysis, but the premiums over spot could be a significant factor when comparing.
True, I do modify what I buy each month based on premiums. For example, I can currently pick American Silver Eagles for $34.10 an ounce or American Gold Eagles for $1,690.40 an ounce; this gives a premium implied G/S ratio of 49.57
 

benjamen

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Mish is swapping out* gold for silver:

http://globaleconomicanalysis.blogspot.com/2012/05/im-swapping-some-gold-for-silver.html

* not physical in hand; account at Goldmoney
I understand if that is his personal choice, but I view it as a bit odd.

1) Silver is trading for 3-4 dollars below its 200 day moving average; Selling after a drop is a classic way to kill your portfolio
2) The Gold to Silver ratio is sitting at almost 54 to 1, which is higher than its 200 day moving average
3) If you are going to do a swap, why not platinum that is trading way below historical and recent ratios to gold and silver?
 

DSAbug

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Stop trying to be perfect. It's boring but just buy a basket.
 

DCFusor

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Benjamin, I have a take on your basic theory. "during times the money supply is increasing" needs a better definition, I think. Trying not to be OT and long both here, but it's germane I think to the whole PM vs fiat (whichever PM) issue. Personally, I'm doing gold, not silver just now, FWIW.

Need to coin a term here - perhaps "effective money supply", not just total bucks.
In my own view, effective money supply has some components required to get a good number. For example, the ratio of available money (fiat) to goods and services. If that ratio goes up, effective money supply increases. This means that even in the absence of actual printing, EMS can go up if goods and services go down.
And vice versa - if goods and services go up, with no money printing, it's deflationary. And if goods and services go down...even without printing, it's inflationary, as the same money is chasing less stuff.

I'm sure we could make further adjustments to EMS via the various M's used to describe money availability, flow rates and so on, but the basic assumption I'd like to add here is that EMS has more than one input. This appears to confuse the simpler minded among us (mostly not we here, but...). I didn't think of it myself, BTW, this concept was used by K Galbraith (yeah, a leftie) to justify a certain amount of deficit spending and printing when goods and services were increasing just to "stay even" in the inflationary sense, and to argue that not all government debt is bad - only most of it.
 

pmbug

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...
1) Silver is trading for 3-4 dollars below its 200 day moving average; Selling after a drop is a classic way to kill your portfolio
...
He's selling gold and *buying* silver. Article at link talks about how he did the reverse - sold silver and bought gold - one year ago before the May silver smash.
 

benjamen

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He's selling gold and *buying* silver. Article at link talks about how he did the reverse - sold silver and bought gold - one year ago before the May silver smash.
Ah, I read it incorrectly the first time. Now his ideas make much more sense!
 

benjamen

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Benjamin, I have a take on your basic theory. "during times the money supply is increasing" needs a better definition, I think. Trying not to be OT and long both here, but it's germane I think to the whole PM vs fiat (whichever PM) issue. Personally, I'm doing gold, not silver just now, FWIW.

Need to coin a term here - perhaps "effective money supply", not just total bucks.
In my own view, effective money supply has some components required to get a good number. For example, the ratio of available money (fiat) to goods and services. If that ratio goes up, effective money supply increases. This means that even in the absence of actual printing, EMS can go up if goods and services go down.
And vice versa - if goods and services go up, with no money printing, it's deflationary. And if goods and services go down...even without printing, it's inflationary, as the same money is chasing less stuff.

I'm sure we could make further adjustments to EMS via the various M's used to describe money availability, flow rates and so on, but the basic assumption I'd like to add here is that EMS has more than one input. This appears to confuse the simpler minded among us (mostly not we here, but...). I didn't think of it myself, BTW, this concept was used by K Galbraith (yeah, a leftie) to justify a certain amount of deficit spending and printing when goods and services were increasing just to "stay even" in the inflationary sense, and to argue that not all government debt is bad - only most of it.
I originally did this write for a forum that is much less technically inclined, so I was trying to keep it simple. I have not had time to rewrite the model due to a very busy life schedule that past few months. If you want to get into the more technical details one would have to consider things like money velocity, which "M" to use, and ratios such as what you already mentioned. I just don't have the time at the moment.
:cheers:
 

DoChenRollingBearing

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I just buy whatever I am in the mood for that they happen have in stock.

Simple system, really. Even a bearing with a hole in the head could understand that one!
 

Jetstream

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I pretty much just consider the gold/silver ratio. Compare it to historic levels, and go from there.
Comparatively speaking, silver is the better buy right now at about 54:1.
 

DSAbug

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I pretty much just consider the gold/silver ratio. Compare it to historic levels, and go from there.
Comparatively speaking, silver is the better buy right now at about 54:1.
Ratios can stay extreme.

I don't like the idea of selling a stack and replacing it because of the premium you lose and then have to repay for when buying. It's more than a "commission". It also puts you in a mindset that your silver and gold can part ways with you. During times like this, I think that is the wrong mindset.

There will be a time where speculation will be rampant and it will be prudent to take some off the table. We aren't there yet.
 

kjansen1969

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Gsr

Ratios can stay extreme.

I don't like the idea of selling a stack and replacing it because of the premium you lose and then have to repay for when buying. It's more than a "commission". It also puts you in a mindset that your silver and gold can part ways with you. During times like this, I think that is the wrong mindset.

There will be a time where speculation will be rampant and it will be prudent to take some off the table. We aren't there yet.
I like the idea of the GSR, but the problem is 1% point can mean the difference between a lot lost or gained when the price of gold keeps getting higher and higher. a 50:1 GSR is standard but if we keep this when gold is say $3000/oz and silver is $60/oz and the ratio goes to 49:1 that means gold dropped $60/oz. Not so bad if gold is like $1000/oz, but the margin for error gets so slim as the price goes up.

Furthermore, I like the whole system you've laid out and I think PM mentioned this indirectly but things like Silver and Palladium have industrial uses which affect the supply, therefore price. 3D printers, cell phones, Ironman, ya know, the standard products.

Ultimately if you're focused on retaining wealth using precious metals as a storage solution, stick with Gold, silver is too volitile for such a thing. I wrote an article on the subject a couple months back. http://goldtrustfinancial.com/my_news/gold-vs-silver-where-to-invest/
 

DCFusor

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The GSR ratio going down doesn't necessarily mean gold went down, silver might have gone up, just sayin', not predictin'.
 

benjamen

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dereksatkinson: I classify my metal holdings as long term savings. It would have to be either a really nice buy or a really bad situation for me to sell off.

kjansen1969: I diversify across all four metals, but units I convert everything into, to use to measure my wealth, ounces of gold. When gold increases in dollars, gold did not become more valuable, the value of the dollar currency dropped.

http://pricedingold.com/
 
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DoChenRollingBearing

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Happy news for those of us who like PM diversification!

Today I was able to buy a 1 oz Pt Eagle, and I paid slightly less than than for 1 oz Gold Eagle (even w/ the high premium for Pt).

I saw the other day that tulving.com now has Pt Eagles!

My lucky day!

Stack, stack, stack. Even if "poco a poco", it adds up. Faith, babez!
 

benjamen

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Happy news for those of us who like PM diversification!

Today I was able to buy a 1 oz Pt Eagle, and I paid slightly less than than for 1 oz Gold Eagle (even w/ the high premium for Pt).

I saw the other day that tulving.com now has Pt Eagles!

My lucky day!

Stack, stack, stack. Even if "poco a poco", it adds up. Faith, babez!
Very nice price on your Pt Eagle! I recently picked up a 1 oz Pt Maple Leaf. Similar quality, but usually $100 less premium for some reason? :shrug:
 

benjamen

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As an update to what these ratios show..

Short term ratios (200 day time frame) show, from cheapest to most expensive:
Palladium
Silver
Platinum
Gold

Long term ratios show Platinum to be very cheap compared to all three other metals. This includes Monday's lowest PL/G ratio ever recorded in this model (since Jan 03).
 
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