Exit Strategy from Gold & Silver?

[flintlock]

Re: Exit Strategy from Gold & Silver?

In the book "When Money Dies", which describes the events in the Weimar hyperinflation, the author describes how some people got very rich by correctly timing their exit from "things" back into cash. The central bank printed and printed until a point was reached where the very last shreds of public belief in the value of paper currency was gone. This occurred at somewhere in the trillions of marks per dollar range. When that last shred of faith was gone, and the public simply would not take the mark anymore (using exclusively foreign currencies or barter) then the government came up with the Rentenmark, which was theoretically backed somehow with mortgages on public land or something like that. They allowed the public to exchange 1 trillion marks for one Rentenmark. That little fig leaf of "backing" was enough to encourage the public that the Rentenmark could be used as a store of value and stopped the hyperinflation. The people who got very rich were the ones who recognized that the appearance of a new, dependable currency was the signal to sell "things" and get cash. Soon, everyone wanted to sell their "things" to get some of the new, reliable cash, and the value of "things" plummeted. Meanwhile, the country was starved for cash, so those who were able to get out of "things" quickly and into the new currency loaned their cash out at interest rates of as much as 100%.

So those who got rich during Weimar were the ones who borrowed money as the currency collapsed, used it to buy "things" and then paid the loans back a few weeks or months later in devalued marks, and then watched for the appearance of a new reliable (relatively) national currency and took that as a signal to sell everything and get into the new currency and then loan it out at astronomical rates of interest.

I get Spam emails from a guy saying basically the same thing.

[flintlock]

Re: Exit Strategy from Gold & Silver?

I think with the current situation in the Middle East we are entering some wild times. "For the times, they are a' changin"

[Adeptus]

Re: Exit Strategy from Gold & Silver?

ej forecast in 2006... gold rally ends in 2011...

Careful metalman, the new itulipers might not be able to detect your sarcasm. Ain't no gold bubble/peak yet folks, not with the Arab world fire just starting (wait at least until Saudi Arabia is 1/2 way through their upcoming revolution), Ben trapped in ZIRP/QE land with contradicting mandates, Europe's dominos teetering ever more but not yet fallen over, China's real estate being out control but no crash yet, their inflation being out of control, but interest rates still playing catchup to their inflation, the COMEX running out of silver, but not yet defaulted on delivery so far.

I'll start worrying about a gold bubble, when SDRs are clearly defined and become offically accepted by the G20, when the Dow/Gold ratio breaks 3:1 (i.e. Dow 9,000 & Gold $3,000) and is on it's way to 2:1 (i.e. Dow 8,000 & gold $4,000), when gold and not the US dollar becomes the defacto flight to safety (I'll be breaking out the champaign that day), when gold is making $100+ swings upwards for several days in a row, when I see line-ups starting to form at my local coin store to BUY gold & silver (not sell it), when metalman changes his alias from mentalman to SDRman, and when this 1980's song makes a comeback:

Did EJ forsee the Fed coming up with a QE-like "tool" back in 2006? I think if not, it should buy us another year or so.

[Sharky]

Re: Exit Strategy from Gold & Silver?

It seems to me that the answer to the "when to sell gold" question lies in what you would buy with the proceeds. Given the ongoing erosion in the USD, I'm looking at ratios instead of price. For example, the Dow to Gold ratio, or the Median home to Gold ratio -- with the idea that when one gets historically cheap with respect to the other, it may be time to switch.

For example, switching from gold to stocks when the dow:gold ratio hits 1:1 has been a very good move (maybe start the switch at 3:1). We're at about 8.6 today, vs. 15:1 as recently as 2008.

OTOH, switching to a new asset class is also predicated to some degree on overall political and economic stability. If we see a dramatic collapse or war (which I don't expect), then it might be prudent to hold gold longer than you would otherwise.

[Chris]

Re: Exit Strategy from Gold & Silver?

this is essentially dan amerman's strategy/recommendation- take out long term fixed rate mortgages on residential and/or commercial real estate, and wait for inflation to make your payments a tiny joke.

jk, have you looked into Dan Amerman's ideas? His recommendation potentially looks like a sound one but at the same time doesn't seem so appealing where we are now. Care to share your thoughts on him?

[charliebrown]

Re: Exit Strategy from Gold & Silver?

hate to admit it, but I still like that song

[jk]

Re: Exit Strategy from Gold & Silver?

jk, have you looked into Dan Amerman's ideas? His recommendation potentially looks like a sound one but at the same time doesn't seem so appealing where we are now. Care to share your thoughts on him?

i was convinced enough by dan amerman's arguments to do a cash out refi on my home a few years ago, at 4.125%. i thought of this as an inflation play. then i used the cash out proceeds to put in a geothermal heating/cooling system to get away from oil. i don't have the personality to manage real estate, so i haven't gone whole hog.

the value of fixed rate debt as an inflation hedge is only one of amerman's main points. the other one is looking at tax consequences to see where you lose on your inflation hedges. if your gold just tracks inflation and you have to pay tax on the gain, you no longer have tracked inflation. you've taken a real [but not a nominal] loss. this is another reason he advocates real estate investment- depreciation.

one of the things i've liked about my geothermal system: it's paying back 10% tax free [in energy savings] on the capital cost [after the 30% tax subsidy on alt energy expenditures]. i wish i had more investments like that.