Timing Your Gold and Silver Purchases

Timing Your Gold & Silver Purchases

A Common Scenario

Have you ever bought an investment only
to watch its value plummet immediately
afterwards? I'm sure that most of us
have. It's not a pleasant feeling to watch
your hard-earned money disappear as
you stand by helplessly, wondering if you
should sell or hang on for the long-term.

This all-too-common scenario brings to
mind a quote by Richard Russell of the
Dow Theory Letters:

by Daniel R., Homemade Investors
Wednesday, June 4th, 2008

Let's begin by looking at some case studies.

******************************************

Case Study 1: Greed and Fear

Question: Which of the following two scenarios presents long-term investors with a better
environment to buy gold or silver?

Scenario A: A Negative Environment

Business News: "After several consecutive weeks of selling, all but the most tenacious gold
bulls have thrown in the towel."

Columnist: "This is extremely bearish action. Although gold and silver are clearly oversold,
investors should take defensive action in case the metals crash their major supports."

Water Cooler Guy: "The past few weeks have been brutal! Yesterday I took my silver coin
collection to a dealer and sold everything!"

Scenario B: A Positive Environment

Headline: "Gold Glitters: Investors continue to favor gold over equities."

Newsletter: "Silver has increased by 30% in the past 6 months. But don't be fooled by
these high prices. Silver's got a long way to go from here, and you don't want to be left on
the sidelines!"

Stock Broker: "Personally, I think you should double your gold and silver holdings. They've
had a terrific run so far this year, and the smart money has been piling in like crazy!"

******************************************

So, which of the above scenarios provides a better environment to buy gold and silver?
Initially, it might make sense to buy when most people are optimistic. After all, markets tend
to go up when people are optimistic, right? Let's hear what Warren Buffett has to say on
the subject of timing investments:

"If [investors] insist on trying to time their participation in equities, they should try to be
fearful when others are greedy and greedy only when others are fearful."2

In short, fear and greed convince average investors to buy high and sell low. How's that for
a strategy? Well, that's precisely the strategy you adopt when you follow your emotions and
end up buying and selling with the crowds.

But what do you suppose happens when an investor ignores his or her emotions and buys
precisely when the crowd is most negative? Although results will differ in each particular
instance, let's look at one example in the next case study.

******************************************

Case Study 2: Buying When People Are Fearful

On December 20th 2007, two analysts made the following comments regarding the much
beaten down precious metals sector:

"People buy because of greed and sell because of fear. They should do it the other way
around. [...] Everyone is terrified of buying right now [...] That means it's time to buy...
Correction's over... Back in the pool."3 - Bob Moriarty

"There is an uncanny silence across the sector – gloom and despondency fill the air.
Incoming Emails have dried up, the all important MSI, the Maund Subscriber Index [to his
newsletter], has dropped back to a cyclical low that in the past has always signaled either a
low, or a point very close to it. [...] The right tactic here is to buy..."4 - Clive Maund

Question: Which of these two analysts followed Warren Buffett's advice?

******************************************

Both analysts heeded Buffett's advice and bought when investors were fearful. In fact, I
remember December 2007 well when these buy recommendations were issued. Gold stocks
(which generally lead the metals) had just suffered a particularly nasty decline. Few shares
were being traded. Gold and silver had also declined somewhat and were trading sideways. It
was though everyone had lost interest in the sector.

Nonetheless, a few bold investors heeded the analysts' advice and bought gold, silver, and
their stocks at this time. And how do you suppose they did? Gold rose about 29% and
silver rose a whopping 50% before topping out in March of 2008, just 3 months
later! Gold and silver stocks also did exceptionally well during that time frame.

Although negative sentiment and low prices will not always produce such spectacular results,
investors who patiently wait for such opportunities are often rewarded with fantastic gains.
Ironically, more investors bought silver in March 2008 after it's 50% rise than they did 3
months earlier when prices were substantially lower. Novice investors who bought silver in
March, probably because they got excited because of silver's recent 50% gain, were almost
immediately punished with a $4 decline! I wonder how many of these sold in the weeks that
followed.

So why is it a good to buy your investments when investors are the most depressed and
discouraged? Here are some reasons:

(1) Investments are selling at a discount - Panicking sellers often oversell an
investment, which can provide a favorable entry point. In other words, it's better to buy a
stock or commodity when it's cheap.

(2) A turnaround may be imminent – Plummeting investments often find a price bottom
just after investor sentiment is at its very lowest (see the previous example). There's a
couple of reasons for this. First, if investor sentiment is truly awful, then everyone who is
going to sell has probably already sold. In other words, selling slows. Second, bargain
hunters start buying. Once buyer volume begins to overtake selling volume, then the decline
is over and a new uptrend may not be far off.

To summarize what we've learned so far, investors should buy precious metals when
sentiment is low and avoid buying when the masses are excitedly driving prices higher.
Okay, that sounds simple enough. But short of conducting a survey, how can investors
quantify sentiment to determine if gold or silver (or any stock or commodity for that matter)
is selling at a relative discount? There are several ways to do this, but perhaps the simplest
way is to look at price charts!

The examination of price charts is called Technical Analysis. Since it often takes time to
absorb new concepts, I've broken this article into two parts. The second part will explain
how you can use charts to time your precious metals purchases more effectively.

Click here to read part 2 of this article.

*******************************************

To sign up for our FREE EMAIL NEWSLETTER, visit our main page at http://www.HomemadeInvestors.com.

Disclaimer: Homemade Investors is published by Homemade Investors LLC. The information contained in this article
does not constitute personal investment advice and is not designed to meet the personal financial needs of any
individual. Investors should seek advice from a qualified investment advisor before entering into any transaction.
The information contained in this article is deemed reliable but is not guaranteed. The information and opinions
contained in this article are subject to change without notice, and there is no obligation to update such. To republish
this article, visit http://www.HomemadeInvestors.com/reprint for guidelines.

© 2008 Homemade Investors LLC. All rights reserved.

Homemade Investors

"Timing is the most difficult thing to master in investing. [...]
Almost any item, bought at the right time, will produce profits.
Most people lose money because they fail in timing their purchases,
and they fail in timing their sales."1
**
So what's the average investor to do? In a previous article entitled
Timing Your Stock Purchases, I explained how investors can use a
few simple principles and charting tools to identify suitable buy
points in stocks. In the current article, I would like to apply these
same tools and principles specifically to gold and silver purchases.

So when are investors greedy and when
are they fearful? Investors often get
greedy when significant gains have
already been made. This "greed"
causes most investors to buy when
prices are relatively high because
they want to get in on the action!

On the other hand, investors are usually
fearful when significant losses have
already taken place. Fearful investors
tend to sell (and refrain from buying)
when prices are relatively low.

Experienced investors often buy when investments are cheap
and out of favor. Novices chase high prices. Don't be a novice!