Gold/Silver bullion question.

The history of past bubbles is never irrelevant. I think Sir Ed was just using that as an example of what not to do, and unfortunately we are starting to see a little bit of it here, even here on CoinTalk, with the sky-is-the-limit-dollar-collapse-I-will-never-sell-my-PMs posts. But I think we still have some time before bubble-mania sets in with the general public, and the panic buying starts. I agree with the rest of what you said.

 

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I always follow these threads and find them very interesting since so many of the posters know much more than I do about economics and everything that is going on with the PMs. I started buying buillon as a way to tie up some money with hopes of one day giving my children down payments for their homes. The other day I was in a coin shop where the owner and a few patrons were all talking about how Silver is going to run to $100 because of the 16:1 ratio to gold, the shorts held by JP Morgan or others and the weakened dollar. I used to say that I wouldn't sell the PMs I had because I had a plan for them in the future, and what would I buy with the money that I gained if silver really did run high, yet most other investments were hurting. While I don't personally believe that silver will run to $100, if it does, I think I'll be modifying my end game and taking profits to help pay for a new vehicle or some other necessity that I'll be needing. Like Sir Ed pointed out, if anyone really knew what was going to happen, they wouldn't have to go to work.

 

I wish you would have saved it Cloud, I would have liked to read it. To me, dollar cost averaging accomplishes two things, both human nature related more than financial:

1. It prevents a person from "jumping in" to a hot market, as individuals are known to do. It is proven small investors chase returns, and will always choose a fund that went up last year versus one that went down. They always assume past performance indicates future performance, which is very wrong.

2. It makes them buy when psychologically they don't want to. The best time to buy anything is when everyone else is wanting to sell. Everyone else, (friends, media, etc), has a very strong affect on people, and without the discipline of dollar cost averaging they most likely would not buy on the lows.

This is why I recommend dollar cost averaging into a market, if someone is not an advanced financial person. Do I do it? Yes and No, because I believe I have the willpower to defy conventional wisdom that most other investors fall prey to. maybe I am just naive. I do do it for a couple investments though.

 

I personally like option one of the three listed, but I am partial to gold. Silver seems to be more volatile.

 

As long as you are right more $$$ than wrong, you are successful. And the idea that there is no alternatives to go to, if you sell PM, is generally not true. It may be longer term and not as "sexy" as metals, but they are there today if you research. IMO.

Jim

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I'm not sure that the person in #1 of your examples belongs in the stock market at all, even with dollar cost averaging. DCA can't protect a person from terrible investment choices.

As for #2, I would venture to guess that many if not most people using DCA won't invest anyway when the market is in free fall. They will skip a payment or make some other modification that will make the long term return even worse than the expected return.

And what might even be worse, the person using DCA might become overconfident in the technique. And after using it for a number of years, if the market suddenly falls, the investor could lose an enormous amount of money compared to the small monthly contribution. I think very few people who are not fairly advanced in investment knowledge could stand the loss or are mentally prepared for it. If someone putting in $100 per month for a decade or more suddenly loses $6,000, the strain will be enormous. They are more likely to cash out whatever remains than to throw more money into it.

So I don't like dollar cost averaging for the psychological reasons as well as the operational ones. Look what happened to many people investing this way in their 401ks. They've largely been crushed over the past few years from cashing out at the lows.

 

But Cloud, your objections are exactly WHY DCA works if followed. You say:

They are more likely to cash out whatever remains than to throw more money into it. - This is why DCA has to be adhered to, and a person cannot bail.

They've largely been crushed over the past few years from cashing out at the lows. - Again, they are abandoning DCA, they should be buying on lows.

DCA can be a powerful tool. Like any tool it has to be followed. I find it convenient for me to get into a market I am not totally familiar with, and good advice for newer investors who are likely to make rookie mistakes like we have described. The tool is only as good as its use. And yes, a strong stomach makes money, its hard to live with sometimes, I know personally, but most of the time it makes money.

 

Once the Silver bubble is finished and we look back at it in it's entirety, we will say the bubble began in 2008. What I meant when I said we aren't in a bubble is that it has a long way to go from here and that these prices won't ever be seen again in terms of the current US Dollar. Anyone who thinks prices are going to dip below $40 and stay there for any length of time is not paying attention to what is happening in the world today.

The Internet allows a lot of information to flow quickly and efficiently throughout the world. This is really the first time in history that free info like that on ZeroHedge.com and tfmetalsreport.blogspot.com is available to the average investor. Going back just a few years to the Tech Stock bubble, no one was talking about bubbles. Even after it burst, most investors didn't know it was a bubble. It wasn't until after the mortgage bubble popped that the term "bubble" became common knowledge.

Right now we are at the end of a US Dollar bubble and US Treasury bubble. Anyone invested in either of them will feel the same pain as those who bought Cisco in 2000 or a house in 2006. PMs provide protection from this bubble. Informed investors all over the world know this and are dumping lots of money into PMs. Once the US Paper bubble begins to pop, the average investor will awaken to this fact and the parabolic stage of the PM bubble will begin in earnest. There will come a day when no one will take your paper trash for their physical metal. There's no way to predict what the dollar price of Silver will get to, but it sure as **** will be above $50 an oz. The key is that the parabolic stage of the bubble won't begin until AFTER the dollar is done.

I've mentioned before, but everyone should understand this point: You will not be able to identify a peak in silver by it's dollar price. The dollar is dying, so the "price" of everything is going to go up (or continue to go up). You will be able to identify an exit point for your Silver investment when compared to other physical things like OIL and REAL ESTATE. Even then I don't know when the peak will be. When 1oz buys 100 gallons of gas? Or when 200oz buys a nice piece of property? Maybe.

Silver is in short supply and increasingly higher demand from both the tech industry and the investing community. The fundamentals are very strong and very, very few people are invested in it. Even on this board I read about people trying to decide whether to buy 2 ounces of it. I want to scream YES! The fact is, only a small percentage of the population is heavily invested in metals. I'd bet that less that 0.1% owns more that 100 ounces. A $4,000 investment at today's prices. Right now the big money investors are loading up at prices manipulated by the futures contract market. I recommend getting on the same side as them.

 

Well, the other part that I didn't bother repeating is that DCA works only in the special case where the price stays low or goes below the initial price for a reasonable length of time during the program, and the price doesn't drop significantly near the end of the program after most of the money is invested. In all other cases, the technique will underperform, sometimes significantly. I know it is a well respected technique, but loses a lot of its appeal when you look a little deeper. So you can follow the instruction booklet packed in the DCA box and still underperform a buy and hold technique [which is also less than optimal] most of the time. I don't think it is suitable for most investors, but I'm definitely in the minority.

 

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Yes, it will have a bad outcome if you buy at higher all along then at the end the price falls. What other technique will overcome a price fall at the end? Lets say a "normal" market, price starts at 10, goes up 1 a year, and then at year 10 falls to 5. Buy and hold would buy at 10 and sell at 5. DCA would buy at 15 and sell at 5. The only adjustment would be the TVM that you lost on the 5 years average value on the buy and hold technique versus DCA. Yeah, you are right, but both are losers. Why would you buy and hold or DCA into a market you suspect a collapse? You wouldn't, so neither methods protected you.

YES, if you KNOW a market will go up, invest as much as you can right now. If you KNOW it will go down sell everything. Problem is, most of us don't know, and we don't know if today's price is good, or tomorrow's will be better. Also, the large majority of investors have the horrible habit of selling when markets fall out of fear, and investing when markets are near their peak. Most of the investors who lose in a market fall are small investors. DCA forces these investors to not give in to their bad habits, and forces them to buy on dip and not overbuy on highs like they want to.

Lets just say silver falls to $20. You and I will not be hurt Cloud because we both bought and held at low prices, ($4 myself). Those who will be hurt will be the small investors who bought at $30 and $40. If a small investor simply put in a small amount each month for the next two years, he will buy fewer ounces on high marks, and more ounces in low marks, giving him a more average market price.

We can disagree man, I know you are as stubborn as me. THis was just posted for others to consider. I have read analysis that shows investing $XX a month versus buying XX units a month lowers your average purchase price, and have replicated this myself.

 

So in laymans terms what would yall advise to do? More gold over silver? silver over gold? neither? both?

 

Diversification, that is what I would advise. If you know you wish to invest in PM, that is your call. If you are going to, I would advise to diversify, buy some junk silver, silver dollars, as well as pure silver. Make sure you pick up some gold as well. I have no clue whihc will perform better in the future, no one knows for certain.

 

Well, in your first example, lump sum investing beats DCA. But I would argue that the lump sum investor would be more likely to bail out of a high market, and the DCA investor would stay the course. If you give them the option of investing or not, the DCA investor will probably do even worse because you introduce the uncertainty in the use of the technique. I don't like the technique, and it imposes enormous emotional problems on people not well versed in investing [because they won't understand why the are losing large amounts of money at times using a "safe" technique] and experienced investors [because they will realize they are being forced to buy at some unfavorable market levels, and prevented from putting larger amounts of money into the market at lows]. You are correct that DCA results in a lower average cost than buying fixed numbers of shares, but that's about all.

If you like the technique, limitations and all, then use it. But I think many people think it can do things for them that it isn't designed to do.

 

If you never owned gold or silver or mining stocks before, recognize that you aren't buying low or early in the game. Don't buy either unless/until you do enough research to understand the positives and negatives [and yes, there are negatives]. If you decide to own them after that, hold both in roughly equal dollar amounts. A lot of people have opinions, but NOBODY can say for certain which one will turn out to be the better holding.

 

During the Hunt Bros bubble when silver peaked, there was as you said a lot of silver utensils, jewelry and dinnerware that was dumped by people who up to a that point had not been invested in silver at all. Once they sold, most of them never got involved in silver again.

A mania can create a curious crowd once a commodity hits a certain level. If you can see it coming, you can hit the exits early.

 

DCA is only one tool in the chest. Used properly, it can at least flatten volatility to an extent in certain types of markets.
But there are so many other factors. The quality and price of the investment itself (Apple is a great company, but a DCA into this stock likely won't do well since the price is already rich). The business cycle (at the end where interest rates are rising and recession is likely or the beginning where rates are falling and an economic recovery is just starting). So many factors to successful investing and even the greatest never get it right all the time.

 

I don't know that real estate is necessarily a good comparison. I expect real estate to continue to drop simply because of supply and demand. Although rent is going up because of that as well which could invite some people back into buying a home IF they can afford it, but I wouldn't be surprised to see a deflationary housing market along side inflationary currency and rising PM's. I do agree with the concept though.

 

I've never been a fan of bullion; I like PMs with numismatic upside potential. You can still get nice rolls of Unc silver coins from the '50s and '60s for not much over spot. I "believe" you should see a nice numismatic "pop" on those dates in about 15-20 years. Even if silver drops, you should have some numismatic price protection.

However, with silver over $40/Oz, the spot price for a 7.236 Oz (pure silver) roll of Washington quarters is nearly $300/roll (ouch!!). I bought my rolls when silver was in the $7-$10 range. I would like to buy more, but not at these prices. I could be wrong so make up your own mind on what to do.

 

What if it drops to $2? Your opportunity losses are as great, except for the $2, as the parties you are referring to. Furthermore, the tax policy of this country allows these investors to write off their basis loss, you won't be able to, except for the $2.

The big fail of the DCA scheme, is that it doesn't give any indication when the time comes to sell the stock. In fact, it encourages people to keep tossing money into an investment that can be very bad for your investment time frame. Your losses or gains are only determined by what you sell it for. DCA does not give anyone any indication when this time arrives and thus it is a very poor investment strategy.