A gold investor of several years contemplates taking profit; Should he?

I think something strange is going on with gold…

As a gold investor of several years I might be feeling good about the recent strength of the metal. I am instead asking more and more often if I should sell. I do believe we are entering a new era of need for crisis containment and it feels good to know you have it.

The old problem with gold remains that it is insurance that will retreat in value as soon as crisis retreats. You can sell after a run and pay taxes and then what. There is no income and apparently no future in holding hard money. A few rental units in the rural area where I live are looking more and more attractive.

Regards,
Dave

Dave presents many legitimate observations and asks some timely questions about gold and the world in general.

…What’s different with gold this time
Gold in euros is at all time highs
Gold in GBP is at all-time highs
Gold in yen is at all-time highs

As we can see, gold keeps rising, and in many major currencies, including the Australian and Canadian dollars, it keeps putting in newer all-time highs. Gold prices have eclipsed long ago their former highs in the major currencies of the developing nations like the peso, rupee, ruble, and real. There is a trend in place right now, which reminds of how gold performed in the middle of last decade as it crossed the $500 mark in the second half of 2005.

Gold should comprise a small percentage (10-15%) of our asset portfolio and we need to appreciate why we hold it. This understanding is important, because if we own it for the wrong reasons (e.g. inflation hedge, currency converting to gold-backing, market collapse, China acquiring gold in size, etc.) we will be disappointed and become disillusioned when it doesn’t perform as we were told. Moreover, we run the risk of misallocating our personal investment capital if we devote working funds to physical gold and expect imminent capital gains.

Why we should own gold and the disingenuous gold promoting and dollar bashing – Know Your Adversary, May 2018

I do not view gold as an insurance policy per se, especially with how most gold bugs view it. As we have explained in the past, in many respects, we see that current monetary policy is actually disinflationary or potentially outright deflationary. The massive addition of debt to the global balance sheet is providing massive deflationary forces that actually should be gold bearish.

Instead, in the face of fading commodity prices, we see gold as the outlier. I find its rise peculiar and persistent. I am a long gold holder, as I have been since 2005, and will continue to hold. I own gold eagles that sell close to spot, as I am only concerned with the movement in the price of gold.

But, gold is telling us something that we should be concerned about. I think it is telegraphing us that there may be an upcoming potential economic catastrophe in the making. Notice how gold began to rise out of its channel in 2005, a full three years before the problems that led to the market collapses in 2008 occurred. I am concerned that we are being warned of another pending financial and economic unwind over the next few years.

As a result, I still recommend gold as an asset. It should not be more than 10-15% of someone’s net worth, but that is just as a passive position. We can certainly trade gold as well, and despite the latest ultra-bearish COT report, I still see price pressure to the upside. The global puppets are doing their best to bring forth the next phase of the new world order. God help us.

If prices on commodities and other assets are falling, it still makes sense to hold cash

The subscriber observes that holding hard cash may be misguided, but I disagree with this somewhat. We see how commodity prices are failing to keep up and how savings rates keep falling. Moreover, the orderly addition of sovereign debt to the collective balance sheet is creating the potential for massive deflationary forces going forward. So, cash could be a viable addition to any portfolio in the face of growing uncertainty.

Of course, I am always a fan of owning rental properties (as long as the numbers make sense and one is not overly exposed to the potential of falling housing prices with over-leveraged holdings.) If one can acquire a property with a mid-single cap rate, that income will come in every year, and will rise as rents climb and mortgage principal is paid down. Moreover, borrowing rates keep falling. Thus, the monthly debt payments have come down for investors more than for owner-occupied loans. Hard money lenders that once loaned out for 8% are lending for 5-6%. There is a lot to be said for receiving consistent monthly income, especially as we get older.

Conclusion

As with any asset, it is important that we scale out of a position as prices rise and scale in as prices fall. I know this sound basic and straightforward, but most novice traders and investors, by definition, do the exact opposite. If you are concerned that gold prices are going to fall – and they could move back down violently as the gold COT report unwinds – then sell a small part of your gold position and lock in profit. I sold 10% of my gold bullion at $850 last decade and thought I was a champ. It continued to move up higher, but I was more comfortable riding with the remainder as gold prices moved violently higher up into 2011-2012.