What happens once QE2 ends?

[HB Reader]

Anyone heavily weighted in precious metals needs to have a pretty clear exit strategy.  I have a set of metrics and a timetable I follow.  If/when we get close, I'll start to scale out to a mostly traditional PP mix.  Investors who decide to get out on "gut feeling" will have a much higher chance of getting burned.  Precious metals are emotional markets.  The peak of a gold bull market will feel like the world is coming to an end.  Selling out of precious metals near a peak will feel like the worst decision, but in hindsight should prove to be the best decision.

Wonk,

After having cut my investment teeth on the 1970s precious metals market, I couldn't agree more.  Even if you sell close to the top, it may take a couple of years before you even know it.  It can be very hard to take profits in the metals when you see them on the news everyday.  

FWIW -- I have about 60% of our wealth in a rigorous DIY 4x25% PP and 40% in a VP that has a substantial concentration in mining and energy stocks.  Within the VP I have been using PRPFX (augmented by a small amount of intermediate term Treasuries) for several years as a sort of "holding vehicle" after taking profits on the mining and energy stocks.  It obviously isn't as stable as cash (e.g., 2008), but many brokerages let you buy and sell it without transaction fees and it makes it much easier to take profits because you don't feel that you have abandoned the metals (or stock) market altogether.  PRPFX now makes up about 25% of our VP.  I know PRPFX wasn't specifically designed for this role, but I have found it makes pulling the trigger on other VP investments easier.

[AdamA]

About 80% of my total portfolio is composed of roughly equal amounts of gold/silver/mining stocks. 

What if your metrics are wrong?  Things can happen so quickly in markets, especially precious metals. 

[MediumTex]

About 80% of my total portfolio is composed of roughly equal amounts of gold/silver/mining stocks. 

What if your metrics are wrong?  Things can happen so quickly in markets, especially precious metals. 

He will lose money, but gain wisdom.

[murphy_p_t]

MT,

I saw you've made predictions on the S&P (and LTT ?).  What's your prediction on gold for the next year? 5 years?

[AdamA]

He will lose money, but gain wisdom.

Definitely lose money, hopefully gain wisdom.

[longeyes]

Anyone heavily weighted in precious metals needs to have a pretty clear exit strategy.

Yes, and it's call re-balancing.

[Wonk]

He will lose money, but gain wisdom.

Definitely lose money, hopefully gain wisdom.

As Craig and MT have pointed out numerous times, asking yourself "what if I'm wrong" is perhaps the most important step in any decision.  I'm not deluded enough to think I can see the future.  I can't.  But I'm confident in the probability of certain events transpiring--irrespective of inflation, deflation or stagflation.  If the probability and magnitude of gain is greater than the commensurate risk, the strategy is a go. Without question it is a speculation--one in which I can lose a good bit of money.  For what it's worth, the metrics aren't even close at this point. 

Part of the speculation relies on game theory (as all speculations do), so it's impossible to predict the future exactly.  If humans can somehow change behavioral patterns or a black swan appears out of nowhere....well, c'est la vie.  It helps that my cost basis is low in a lot of the investments.  I didn't buy gold at the low in 2001, but the bulk was still in triple digits.  I was fortunate (lucky?) enough to get all of my silver in the low to mid teens.  I have not purchased silver in the last few months.  Miners are up 40%+.  If I'm wrong, I'll lose in opportunity cost, but probably not in nominal value.

I may gain wisdom if I'm wrong, but who knows.  I know I wouldn't take a risk like this if I were 50+ years old because the risk/reward profile would not be the same.  I don't fear regret of things I've done that have gone sour.  I fear regret of chances not taken that I believed were worthwhile.

[Wonk]

Anyone heavily weighted in precious metals needs to have a pretty clear exit strategy.

Yes, and it's call re-balancing.

I understand market timing is largely verboten here.  Rebalancing is for passive investing and is what I do for the remaining 20%.  Speculators don't rebalance.

[AdamA]

I may gain wisdom if I'm wrong, but who knows.  I know I wouldn't take a risk like this if I were 50+ years old because the risk/reward profile would not be the same.  I don't fear regret of things I've done that have gone sour.  I fear regret of chances not taken that I believed were worthwhile.

Your point is well made and well taken, Wonk.  For what it's worth, I was speaking in a general sense, and was certainly not trying to imply you were somehow stupid for investing/speculating in precious metals. 

Also, I'm probably subconsciously jealous that I didn't get into gold when it was in the triple digits. 

[Wonk]

I may gain wisdom if I'm wrong, but who knows.  I know I wouldn't take a risk like this if I were 50+ years old because the risk/reward profile would not be the same.  I don't fear regret of things I've done that have gone sour.  I fear regret of chances not taken that I believed were worthwhile.

Your point is well made and well taken, Wonk.  For what it's worth, I was speaking in a general sense, and was certainly not trying to imply you were somehow stupid for investing/speculating in precious metals. 

No offense taken.  Feel free to insult me whenever you like though...I have thick skin. 

Also, I'm probably subconsciously jealous that I didn't get into gold when it was in the triple digits.   ;D

Don't be.  In 5 years there will be little difference between high triple digits and low quad digits.

[MediumTex]

MT,

I saw you've made predictions on the S&P (and LTT ?).   What's your prediction on gold for the next year? 5 years?

My crystal ball is cloudy on this question.

My intuition is that the price of gold five years from today will be in the $2,500-$3,000 range, but I am not confident in this prediction.

[cabronjames]

^ I don't know what to make of gold price estimates, since gold tends to do well during inflation.  So what does 2016 price of $2500 mean?  I guess it would help noting the price somehow estimating CPI inflation (yes it's understated, but what else do we have as inflation measure to reference?).  For example, state the 2016 price assuming current 2011 constant dollars.

The PM bugs that give huge price targets like 5000/oz, don't even say a year of their "target", so the estimate is meaningless.  Altho this seems to be a general problem of price estimation of CNBC cristal-ball types, with their nebulous "short-term", "long-term" predictions.  They should say Jan 2012, Jan 2020, etc instead of these nebulous "terms", & assume current 2011 dollars.

I have no clue on the future of gold.  I do sense that if gold falls some, certain central banks, & Indian & Chinese public will buy more, limiting the fall.