How Will I Know When To Sell My Gold?

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(December 2012)

NEVER sell your gold because you want to hold it for the rest of your life and pass it on to your grandchildren.

Or

Sell your gold NOW (big mistake – my opinion) if you believe that gold is in a bubble or never should have been bought (as per “gold-bashers” Warren Buffett and Charlie Munger).

Most of us will sell sometime between now and never. What is an objective method to determine when to sell?

Technical ratios at which it might be sensible to sell some of your gold

Sell some gold when the gold to silver ratio drops down to around 15 to 1. The gold to silver ratio is currently about 51 to 1. When gold and silver prices have both risen beyond all typical expectations, the ratio will probably drop to between 10 and 20 to 1. The ratio was about 17 to 1 at the bubble peak in 1980.

Sell some gold when the Dow Jones Industrial Average (DOW) ratio to gold (DOW/Gold) has dropped to near 1 to 1. The ratio is currently about 7.5 to 1. The ratio could reach 1 to 1, for example, if the Dow were priced at 10,000 and gold was selling for $10,000 per ounce. At the peak of the 1980 gold bubble, the ratio was approximately 1 to 1.

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Sell some gold when the gold to crude oil ratio rises to perhaps 30 to 1. For example, if crude oil is priced at $300 per barrel and gold is priced at $9,000, that is a 30 to 1 ratio. In 1980 the peak ratio was about 25 to 1.

Sell some gold when you can pay off the entire mortgage on your house with 10 to 20 ounces of gold.

(I suggest you only sell “some” of your gold, not all of it, because it is always a good idea to keep some “real money” and not be utterly dependent upon unbacked paper currency.)

Sentiment-based timing to consider selling gold

Sell some gold when the “money honeys” on financial TV are running one story per hour on the rapidly rising price of gold.

Sell some gold when Time magazine posts a picture of gold bars on their cover with a caption “The new bull market in gold.”

Sell some gold when your hairdresser/barber gushes about the gold she/he just bought and how it is sure to triple in price soon.

Sell some gold when there are lines of people waiting at coin shops to buy gold.

Sell some gold when people finally realize that “money (unbacked paper money) is accepted only because money is accepted,” and people have become reluctant to accept paper money.

Sell some gold when people have realized that money only has value because people have faith in its value, and people have finally lost faith in unbacked paper money.

Additional thoughts: Jim Sinclair suggests that, regarding gold, people should “buy fish lines and sell rhino horns.” Stated another way, when the price has collapsed in a price spike down (looks like a fish line extending downward from a fishing pole) then we should buy. But if the price has risen in a parabolic pattern (looks like a rhino horn), then it is time to sell a portion and wait for the correction. If the price has fallen too for, too fast, and there is no fundamental reason for the price collapse, buy more. If the price has rapidly rallied to new highs far beyond expectations, then it has moved too far, too fast. Those markets rallies, whether in gold, silver, the NASDAQ, crude oil, or real estate, always seem to correct in a crash. Examples include Gold and Silver in early 1980, the Nikkei 225 in 1990, and the NASDAQ in early 2000. It seems likely that gold and silver will go into a parabolic rise within a few years unless the money printing ceases – and we should plan on the money printing continuing for a LONG time.

The common denominators are the human emotions of fear and greed. In simple terms, greed drives the market to new highs and fear causes the crash. People were “getting rich quick” when the NASDAQ rallied from about 1,100 to about 5,000 in less than 2 years – when greed had the upper hand. But when the NASDAQ reached a natural stopping point, fear took over and people sold in panic or to preserve what value remained. If they did not sell and rode the market all the way down, they lost a significant portion of their investment and paper profits. Fear caused people to sell, which created more fear and selling, and the waterfall decline fed upon itself until the sellers were exhausted.

Similarly, in 2008, when gold had collapsed from over $1,000 to under $700 (the price today is about $1,700) in seven months, most amateur investors were reluctant to buy because they were fearful that the price of gold would decline further. Professionals buy the bottoms and sell the tops. Fearful amateurs sell down into the bottoms and then buy back near the tops when greed takes over.

If you bought gold, which is currently in a long-term uptrend, then waiting will eventually bring success, even if you purchased at a temporary top. However, if you were buying Enron Stock some years ago, then waiting only magnified the disastrous investment. Study the fundamentals of your investments until you understand the differences.

When will gold reach $4,000?

The Bottom Line: Buy when the “blood is running in the streets,” and sell when everyone else wants to buy. Use ratios from other markets as objective measures to indicate probable price extremes in markets. We can seldom pick the precise bottoms and tops, but we can carefully observe while others are being swept along by their own fears and greed. If we can keep our heads while others are losing theirs and make sound decisions based on numbers, analysis, and comparison ratios to other markets, we can make intelligent and informed buy and sell decisions. For now, it makes sense to me to hold gold and silver and to carefully evaluate everything else. Massive and supposedly unexpected changes can occur with surprising rapidity. Check here for additional commentary.

GE Christenson
aka Deviant Investor

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4 Responses to “How Will I Know When To Sell My Gold?”

  1. aurochs says:

    Sell your gold? To be paid in what… worthless paper IOU nothings? Makes no sense at all. If you understand that gold is NOT an “investment” but rather the soundest form of MONEY, then it doesn’t make sense to “sell” it. You may at some point choose to spend some of it on capital assets that will increase your wealth or chances of survival, such as to bribe a border guard as you flee local tyranny or for food or shelter when your fiat paper scrip will not be accepted in trade and your family is hungry or perhaps for an income producing business or homestead. But don’t be fooled into thinking you can trade gold for fiat currency and make a “profit” by doing so. How much monopoly money will you accept for even one gram of your gold or siver?

    • Your position is rather strong. How about thinking of “selling gold” as converting from one asset to another. At some point, it seems likely, gold and silver will have made a huge move up when measured in decreasing value dollars. At that time it might make sense to pay off a mortgage or buy a piece of farmland or some rental property. Or perhaps to bribe that border guard, as you said. At some point, the financial system will stabilize, probably with a new currency, and then things will look different. Perhaps then it will make sense to convert gold to some other asset – perhaps even cash in a new currency. I don’t know – the future is uncertain.

      GE Christenson
      aka Deviant Investor

      • aurochs says:

        I don’t know either as the future certainly is uncertain. What I do know with a very high degree of certainty is that gold (and silver) will continue to fit the definintion of MONEY better than any artificial invention of politicians or bankers and it will do so far into the future just as it has done since the beginning. Spend the fiat, save the gold.

        • I totally agree. Very well stated. I hope others read your comments and carefully consider them. Paper always returns to its intrinsic value of zero – and the world will probably relearn that lesson in the years to come.

          GE Christenson
          aka Deviant Investor

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