With all the world turmoil, high inflation, war in Ukraine, China rattling their saber, gold has gone up in price. Trading Economics tracks gold prices for the last 12 months.
Less than a year ago, gold was just under $1,700/oz. It recently hit $2,050/oz. and was knocked down $60/oz. the following day.
Remember the old saying, there is never a bad time to take a profit. Is it time to sell and take profits, or hang on?
The FIRM answer is – “it depends!”
Gold has a special place. Let’s ask, why did I invest in gold or gold stocks? While the asset, (gold/silver or precious metal stocks) might be the same, it can be bought for several purposes.
Here is how I classify it.
Physical metal – I buy it for insurance (core holdings), the ultimate inflation protection. Gold is real money – paper money always fails. Wolf Street shows how our dollar is tanking:
J.M. Bullion shows us gold has gone up almost eightfold during that same time period.
I don’t ever want to sell from our core holdings, the catastrophe would be horrible. I want to pass those assets along to the next generation.
Precious metal can be stored in various places, including your home. Each location bears some cost/risk. A side note… If you store metals at home, DO NOT tell anyone; loose lips, sink ships goes for metal storage at home too.
I don’t own collectibles, but rather coins that are instantly recognizable and their value published daily on world markets. Collectibles claim value because of their rarity and desirability. I don’t want to have to negotiate the value of jewelry or collectibles. Should I ever be forced to sell some core holdings, I want liquidity at the fair market price.
Physical metal #2 – This is the same asset bought for a different purpose, speculation. Your intention is to time the market, buy and sell at the right moment and make profits on your trading. I recommend this is earmarked; held separately.
Metal mining stocks – These are established mining companies that bring metals out of the ground to the market. This is NOT speculating in exploration companies, junior mining stocks hoping to find gold.
Many times, these mining stocks have out-performed metals during high inflation. Their mining costs are fixed. Every $1.00 increase in the price of gold/silver generally goes straight to bottom line profit. In the last year the selling price of their product increased almost 25%. Stockholders should be rewarded with not only stock appreciation, but also increased dividends.
These stocks can be bought as a great hedge against inflation, and for asset appreciation. Remember to segregate this in your mind, and perhaps portfolio. When/if you decide to sell, what was the reason you bought it?
Royalty Companies – These companies generally help finance mining operations. Not only do they earn interest, but they also receive an agreed upon portion of the finished product. When the selling price of the metals go up, it all goes directly to profit. The additional profit can be used to help the company grow, as well as pay increased dividends.
You can buy these for income, stock appreciation and an inflation hedge.
Should I Sell? It Depends…on What?
Let’s look at Royalty Companies first. I hold them primarily for appreciation and income; particularly with fixed income rates being negative. One example is Wheaton Precious Metals (WPM).
When silver prices drop, I will generally add to our holdings. As silver goes up, I have sold covered calls for additional income. Should I feel the silver price is about to reverse, I will sell part of our position. I’ve never sold it all, holding a certain number of shares for inflation protection.
If you bought metal mining companies, is it time to take profits? Where do you feel the price of metals will go, and where you would reinvest the cash? If you need cash, taking some profit would make sense.
As an analogy, when toilet paper was worth more than a barrel of oil, we bought Energy Select Sector SPDR fund (XLE). We increased our holdings right after the election, anticipating the new administration would shut down US oil production. We are currently up over 100%. Should I take profits? I’m choosing not to.
Here in Phoenix gas prices have doubled in the last year. Pump prices jumped $.60/gallon in the last week. Nothing appears to be happening that will bring oil prices down; it looks like they will go higher. I asked a friend how high will the public allow gas prices to go before they join the truckers and head to Washington? Should something change, we will sell a portion and take profits.
Let’s discuss physical metals #2. If you bought with the intention of buying and selling down the road at a profit, you must ask yourself, is it time to take some profits? Am I willing to be satisfied to take profit, and not fret if prices continue to rise? No one can time the market perfectly.
Many years ago, I took craps lessons. The most important lesson is when to quit. I had to teach myself to take my chips, turn my back and be satisfied. I didn’t want to watch and see what happened, it was not relevant…. Profits are good, don’t get greedy!
Core holdings hold a very special place and are treated differently. They are bought and held for insurance, hoping things never get so bad that you are forced to sell to survive. You buy fire insurance and hope you never have a fire.
If gold jumped from $2,000 to $5,000 overnight because of world turmoil, I would hope to not be forced to sell it. You bought it as wealth insurance. Central banks are doing nothing but fueling the inflation flames even more. As inflation continues, there will be many more buyers getting into the game driving the price even higher.
Currently our core holding have more than doubled in value. Were I to sell it, I would have cash. What happens if we have hyperinflation, and the USD is no longer looked upon as the world currency? Where would I invest it safely and not worry about inflation?
The day after gold dropped back under $2,000 Chuck Butler wrote in The Daily Pfennig,
“Today’s Data Cupboard has the stupid CPI prints for Feb…. I read where the White House is leery that this report could show really strong inflation gains last month…. I would think that by now they would have figured out that this inflation isn’t going anywhere but up….
…. Soaring U.S. inflation is expected to continue its surge with no sign of relief in sight, as the costs of consumer goods like gasoline and household items climb to new heights. But then we might not see it that way when the stupid CPI prints today, because of the way it gets calculated…. I’ve explained all that before, so I won’t go into it again today, just be aware that real inflation is only calculated by shadowstats.”
As Chuck predicted, inflation surged and the president told reporters to blame the Russians.
As an aside, I’d encourage all readers to sign up for the The Daily Pfennig. Chuck tells it like it is, no holds barred, and it is FREE. When I open my email each morning, I click on it FIRST.
I’ve been asked, what would cause you to sell some of your core holdings?
Simple – Personal financial Armageddon!
Most investors keep track of their portfolio and their cash flow. The old saying, “Live off the interest, but never touch the principle” applies in a different context. Today’s interest rates are negative when factoring inflation into the equation. So, it must be “Live off your income and keep your portfolio intact.”
We hope for enough positive cash flow to pay our bills for the rest of our life from social security and other sources of income (rental property, part time job, etc.). Should something unexpected happen, like a major medical issue where a family member needed help, you may have to reestablish priorities and tap into your core holdings.
Should inflation cause living costs to rise so dramatically your income does not allow you to meet your obligations, you have little choice but to sell some core holdings.
When do you tap into your core holdings?
When you have little choice, and no other options available. Personally, I would sell the most liquid first like stocks. It would be a delicate balance between selling physical metals and stocks. Liquidity will be important.
The bottom line is simple. You bought your core holdings for insurance and hope you never experience the catastrophe. When precious metal prices rise as they have lately, it’s time to check to make sure you have enough to remain comfortable and sleep well.
If you feel you need more, the pundits recommend you set up a regular buying program, buying in tranches to level out your cost.
Hope you get to the end of the line with your core holdings intact. Your heirs cost basis will adjust to the current market price. The challenge is in educating them to hold on and hope they pass it on to their children.