The Art of Speculation


After 50 years of global investing, my chief mantra is “There is always something we don’t know!”   

This fact rules the price of gold and precious metals which is why I look at owning them is never an investment but a speculation.  Precious metals are financial insurance against inflation for sure.  But isn’t all insurance a speculation ?  I have never had a fire in my house, yet fire insurance does make sense.

So let’s look at how to refine the process of buying, selling and owning precious metals a bit more.   For example see why the Kunlun mountains (below) can have an impact on the price of gold, that’s not even related to mining.

india

The Kunlun Mountains.

In February and March 2017, a significant economic event took place that can have an impact on the price of gold.

Updates in our Purposeful investing Course look at ideal speculative opportunities in precious metals.   One ideal condition we track is the gold platinum ratio when the price of platinum is lower than the price of gold.

Platinum dropping below gold is a historical distortion that rarely happens.

Unless there has been a most basic change in the relationship between these two precious metals, whenever platinum costs less than gold, we speculate on the simple fact that platinum’s price will rise faster than gold’s until this distortion has equalized.

Yet the facts that dictate the prices of precious metals are rarely simple.

For example, there is conjecture that the growth of electric cars will reduce the need for platinum in catalytic converters.  This could be since about half of platinum’s demand has been for this purpose.  Yet let’s keep in mind, it is estimated, that one-fifth of everything we use either contains platinum or requires platinum in its manufacture.  Plus the gold platinum relationship existed well before catalytic converters and platinum still sold for more than gold.

Another example is that the price of gold could drop.  Platinum’s price could rise faster than gold, but if gold is plunging, platinum could outperform gold but stagnate or drop as well.

The relationship between gold and platinum is simple, but there are many factors that have an impact on the price of gold.  European interest rates, US and global inflation, US interest rates, US dollar strength, US job market, US economic growth, US trade deficit, crude oil are a few.   The chart below shows the importance of gold to interest rates.  So the current rising trend of US interest rates could hinder a rise in the price of gold.

gold

Chart from Marketrealist.com (1).

An article at Marketrealist.com:  “Why real interest rates impact gold prices?” (1)  helps explain why US interest rates matter to the price of gold.

Gold is used as an investment alternative.  Investors think that it protects money’s purchasing power.  As an investment, it has to compete against other investments that are available in the market.  The interest rate is a big factor here because it determines the attractiveness of those investment alternatives.  As real interest rates rise—interest rates adjusted for inflation—other investments usually become more attractive.  This reduces the demand for gold and vice versa.  Gold usually has an inverse relationship with real interest rates.

Rising US interest rates are a downwards pressure for gold prices and gold-backed exchange-traded funds (ETFs).  Since gold and platinum (and silver) are related, US interest rates also have an impact on these precious metals.

What many investors miss is the fact that Chinese and Indian interest rates are also important factors that affect the price of gold.  Both Chinese and Indian cultures have a historical leaning towards trusting and owning gold.  They are becoming increasingly important factors as China and India become larger parts of the global economy. 

If one eliminates Switzerland (the biggest importer of gold with over 70 billion worth of gold imports), Asia is the largest importer of gold (90 + billion worth compared to Europe’s 30 + billion).  China and India are the two largest Asian importers by far.

Increasing yuan and rupee real interest rates will stimulate investors to build up savings in those currencies instead of gold.  This is a downward pressure on gold prices and gold-backed ETFs.

After more than a year of steady interest rates, in both February and March 2017, the People’s Bank of China raised yuan interest rates.

yuan

Indian interest rates continue to fall, but should also be watched.

indian interest

Indian Rupee interest rate – both charts from www.tradingeconomics.com (2)

Here is another interesting question.  If interest rates in these Asian countries impact gold’s price, what would be the impact of an Indian/Chinese conflict or war?  China and India have long had border tensions.  There was a Sino-Indian War in 1962 over disputed Himalayan borders.  At that time, the Chinese launched offensives in Ladakh and across a line (McMahon Line) regarded by India as the legal national border that disputed by China.  Disagreements have remained since that time.

The book “Why India Is Not a Great Power (Yet)” by Bharat Karnad, outlines a number of events that could lead to a Chinese Indian conflict. One of the causes could be these tensions that include border skirmishes. Tibetan protests and maritime disputes are others.

Karnad, a professor of National Security Studies at the Centre for Policy Research in New Delhi, suggest that India should be more aggressive to increase its position on the world stage.

His suggestions include nuclear land mines in the Himalayan passes, arming China’s neighbors like Vietnam with cruise missiles and atomic weapons, and actively assisting armed uprisings in Tibet.

Could any of these steps create a spike in the price of gold and consequently silver and platinum?

Screen Shot 2017-04-10 at 9.11.49 AM

Learn more about “Why India is not a great power (yet)?”

This image from India.org (3) shows a meeting between Chinese and Indian military at a conflicted border.  What happens if minor arguments as described in the article turn into something more serious?

Screen Shot 2017-04-10 at 9.20.36 AM

The distance of Tibet to the US east cost is about 8,500 miles.  What events, so many miles and times zones away, might be taking place that can have a serious impact on our wealth?

The answer is that we do not know and this is why ownership of precious metals is a speculative proposition.  Rising interest rates in China and India could cause prices to fall, but a skirmish or two or the planting of a few atomic mines and precious metal prices could skyrocket like they are nuclear powered.  Well, in a way they would be.

There is always something we do not know which is why when we speculate, especially in precious metals, we never risk more than we can afford to lose.  We leave plenty of time for the investments to mature.  Our recent Pi Update explains how to calculate profit and loss in precious metal speculations.

Gary

(1) Tradingeconomics.com:  Yuan interest rate

(2) Marketrealist.com:  What rising US real interest rates mean to gold investors

(3) Zeenews.india.com  China upset by reported hut demolition on India border

Borrow Low – Invest High

A special value investing tactic makes high risk, high profit speculations safer and more profitable.

For example in 2015, a 10,000 pound loan (in British pounds at $1.52 per pound) was used to purchase 1,091 shares of the silver ETF SLV.  Those shares rose to be worth $20,421 by 2016, a 34.34% additional profit.

 

From July 2015 to July 2016, the price of the silver ETF  iShares Silver Trust (Symbol SLV) rose from $13.92 and ounce to $18.71.  You can see the rise in the finance.yahoo.com chart below.

yahoo

A 10,000 pound loan (the pound was $1.52 per pound) purchased 1,091 shares of the silver ETF SLV.   Those shares rose to be worth $20,421 by 2016,  a 34.34% additional profit.

The profit did not stop there!

From 2015 to 2016 the pound dropped from $1.52 dollars per pound to only $1.39 dollars.  The 10,000 pound loan that had worth $15,200 in 2015 only required $13,900 to pay it off in 2016.

yahoo pound chart

The falling pound had created an extra $1,300 profit.

Do the math: 

Silver worth $20,421

Loan payoff  $13,900

Profit             $6,521

Cash Required  Zero

All this profit was made on the 10,000 pound loan.  No cash was required on the investor’s part.

The entire $6,521 was pure… extra profit.

Some investors borrowed less… others borrowed much more so their profits were even higher.

This example came from our Purposeful investing Course (Pi) which studies three main layers of value investing tactics in real time.

Tactic #1: Diversify equally in good value developed and emerging stock markets.
Tactic #2:  Use trending algorithms to increase, reduce or hold positions in these markets.
Tactic #3:  Add spice to a portfolio speculating in precious metals, when their price is under “ideal conditions”, using leveraged, low value currency loans.

An “ideal condition” is a rare distortion in an economic fundamental that history has shown “almost always” corrects itself.

The words “almost always” indicates that there is risk.  There is risk that a basic fundamental has changed and the distortion will not correct in any targeted period of time.   Or a new fundamental has shifted dynamics to such an extent that the distortion never corrects.  There is always risk.

Profit is the reward for taking that risk, but there is always a chance of loss which is why the third layer speculation is to be used like a spice… sparingly.

Pi looks for several ideal conditions in precious metals using the price of gold based on over 40 years of speculation in precious metals.

The first condition is gold’s price to inflation.   Gold is the anchor of the strategy but its ricing is perhaps the most speculative since a meaningful inflation rate is hard to define.

Gaining a true perspective on gold’s value is difficult because the price of gold was fixed for many years.  The gold price was fixed at $35 an ounce at the end of WWII and this fixing did not take into account the huge inflation this conflict created.   This also impacts any accuracy in understanding what the real the price of gold should have been at the end of the war.

Statistics can be misleading.  In the report Platinum Dip 2018 there is an analysis of inflation.

These factors distort the accuracy of the picture.  How much is gold really worth now?  What is its real value?  This is truly THE golden question.

At this time the magic number we sue for gold is $1,225 an ounce.  If gold’s price is much higher than $1,225, than the Silver Dip or Platinum Dip are not in an ideal condition.

When gold is priced ideally, then there are several ratios that can alert us to an ideal condition.

The first ratio is the gold to silver ratio.  When the gold silver ratio reaches 80 we consider speculation in silver to be ideal (if gold is ideally priced).

This value indicator is simple because the gold silver ratio is rarely as high as 80, only three times in 36 years as the chart below shows.

gold silver spread

Chart from www.goldprice.org/gold-silver-ratio.html#36_year_gold_price

The spread was over 80 when we issued the original Silver Dip in the 1980s.  30 years later ideal conditions coincided again. The chart above shows how the spread was shooting towards 80 when we issued the Silver Dip 2015 report.

The spread hit 80 in 2015 and again in March 2016, but we can see from the chart above that a drop in the spread was on its way. The trend was for a continued lowering of the spread as silver’s price rise was much stronger than gold’s throughout 2016.

This chart below from infomine.com shows the trend clearly.

silver

http://www.infomine.com/investment/price-ratios/gold-silver/10-year/

Another ratio we watch is the gold to platinum ratio.   When the price of gold rises above the price of platinum, platinum’s price is at an ideal condition.

Platinum is a good value when it sells for less than gold and gold is close to our below its fair price ($1,225).   As the chart below shows, platinum costs more than gold more often than not.  The fundamental reasons for platinum’s high price, including platinum’s supply scarcity support this.

The chart below from Kitco.com shows the gold-platinum ratio.  The ratio is the red line and right axis.  The price of gold is the yellow line, left axis.  The price of platinum is the blue line, left axis, from 1975 to May 13, 2016.

gold

http://www.kitco.com/commentaries/2016-06-27/Gold-to-Platinum-Ratio.html

Notice how each time the gold-platinum ratio (red) has spiked, 1975, 1982, 1985, 2002, 2009, shortly after the price of platinum (blue line) has skyrocketed shortly after.

The gold-platinum ratio was at an almost  historical low when this report was written and the “Silver Dip 2017” recommended a shift from speculating  in silver to speculating in platinum. The 2017 report recommended leveraging the platinum ETF “ETFS Physical Platinum Shares” (Symbol) PPLT.

The spice.  This type of speculating is not done on its own, but as an adjunct that enhances an existing equity portfolio.  The portfolio is used as collateral for a loan that is invested in the metal with an “ideal condition price”.

Let’s examine how a speculation in silver (based on a gold silver ratio’s ideal condition) increased the profits of a portfolio of good value developed and emerging market equity ETFs.

This study looks at the $100,000 invested in a portfolio we began tracking in our Pi course.  The portfolios were started September 2015 (591 days before this study or 17 months ago).  70% was invested in ten good value developed market ETFs and 30% in 10 good value emerging market ETFs.

This is a list of the shares in the Developed Market Portfolio.

Screen Shot 2017-02-19 at 12.30.18 PM

This is a list of the shares in the Emerging Market Portfolio.

Screen Shot 2017-02-19 at 12.30.55 PM

The good value portfolio was up 4.64% (a gain of $3,248) since inception and the emerging market portfolio is up 6.72% (a gain of $2,016).

A portfolio of these shares with an original investment of $100,000 invested 70%-30% after 591 days (February 2017) was worth $105,267, a 5.26% gain.

In this study we examine the change in performance when an additional $10,000 was risked on the iShares Silver ETF (Symbol SLV) beginning March 2016 when the gold silver ratio broached 80.

Image from www.macrotrends.net/1441/gold-to-silver-ratio

The price of SLV was $14.01 in March 2016 and is currently $17.06.

Screen Shot 2017-02-19 at 12.50.25 PM

Image from https://finance.yahoo.com/chart/slv?

Let’s examine profits under three different exit strategies.

Exit strategy #1:  No exit.  The $10,000 was worth $12,163 at the time of this study (February 2017).

Exit Strategy #2: Exit when Tradestops issued a Stop Loss signal November 2016 at a price of $16.07 per share.  The $10,000 was worth $11,457.

Exit Strategy #3: Exit when the Gold silver ratio dropped below 70 on January 2017.  The $10,000 was worth $11,365.

The overall portfolio performance was improved in each situation.

Exit strategy #1:  Profits increased from $5,267 to $7,430.  A 10% increase in the portfolio added a 41% increase in profit.

Exit Strategy #2: Profits increased from $5,267 to $6,724.  A 10% increase in the portfolio added a 27% increase in profit.

Exit Strategy #3: Profits increased from $5,267 to $6,632.  A 10% increase in the portfolio added a 26% increase in profit.

All of these additional profits were gained without a penny of extra investment.  All the profits came from loans that were invested in silver.

The other benefit beyond profit is safety from time.

When leveraging investments, time is most important.  Because leverage is secured by the entire portfolio rather than just the additional investment, the odds of a margin call are almost nil so the investor gets to determine how long the investment will have to mature.

Let’s take an example of the good value Pifolio above.

In this study the loan was $10,000.

The collateral is not the $10,000 investment in silver, but the entire portfolio which is now $115,267 ($105,267 plus the $10,000 in silver).

This means (if the rules of the lender requires a two to one loan ratio) that the portfolio would have to drop around 75% before there would be a margin call.  Such a loss is highly unlikely.

This margin has as much time as is needed to let fundamental forces work through the market.

Any profit gained comes without adding a penny to the portfolio.

The most important elements of making good investments are price and time.  There is always something about investments we won’t know, but the one thing we can trust is that investments purchased at the right price, and given time, have the highest odds that profits will flow.

Silver is falling. 

slv

Chart from finance.yahoo.com/chart/SLV?

Recently the silver ETF iShares Silver Trust (symbol SLV)  was priced 18.62% below the highest close of $19.60 from last August.   The mathematical system we track created a stop loss price of $16.18, showing that this precious metal moved into selling territory.  Now the share price is in the $15 per ounce range.

We Use Math to Spot Value. 

Whether one likes to trade or invest and hold, math based financial information works better than the spin, rumor and conjecture of the daily economic news.   Mathematical based investing can put us on a solid path to everlasting wealth that is not easily diverted by the daily drama that seems to be unfolding in the modern world.

For example, our Purposeful investing Course teaches three mathematically based routines that have been proven to out perform the market over time .

The first routine in the course is the quarterly examination by Keppler Asset Management of 43 equity markets and analysis of their value.  This makes it possible to create a base portfolio of Country ETFs based on basic value.  This passive approach to investing in ETFs is simply to invest in Country ETFs of good value equity markets.

For example, Keppler’s analysis in 2017 shows that the “Good Value Developed Market” Portfolio is twice the value of a US market index fund and a much better value than any of the other indices shown.  These are based on the cornerstones of value, price to book, price to earnings and dividend yield (except the European dividend yield).

The Good Value Developed Market Portfolio offers even better value than the Morgan Stanley Capital Index  Emerging Market Index.

keppler

History shows, that over the long run, math and value drive the price of markets.

Using math makes it simple, easy and inexpensive to diversify in the predictability of good value.

The second tool Pi provides is a way to actively monitor and shift the good value markets using trending and volatility algorithms.  These algorithms allow us to trade good value markets through downtrends and upticks to increase profits in a diversified even more.

These trending algorithms use the math that spotted the current condition of silver.

Use math to spot distortions that create ideal conditions for speculation.

Pi teaches the strategy of speculating in metals when speculative conditions are absolutely ideal.  The Silver Dip relies on a really simple theory… gold should rise about the same rate as other basic goods and the rise and fall of silver’s and platinum’s price should maintain a parity with gold.

Our math based study has created an ideal price for gold and though its trending up it has passed the good value level we use.  Gold is still okay, but not a bargain any more.  Value investors only seek bargains.

When “Silver Dip 2017” was written profits on silver had been taken.

Platinum conditions are ideal for 2018.

Since 2014 the price of platinum has fallen below the price of gold and at the beginning of this year reached a historical low.  The distorted gold platinum spread suggests that platinum is a very good value so we are updating our dip report, and it will be the “Platinum Dip 2018”.

The report explains how to speculate in platinum plus outlines the following:

  • How to use theDip strategy in platinum without adding a penny of cash if you already have investments.
  • How to invest as little as a thousand dollars in platinum if you do not have a current investment portfolio.
  • Why this is a speculation, not an investment and who should and should not speculate and how to limit losses and take profits.
  • Three reasons conditions are better for a Platinum Dip now.
  • Three different ways to invest and speculate in gold, silver or platinum in the US or abroad.
  • How to buy gold and silver or platinum with or without dollar leverage margin accounts.

The “Platinum Dip 2018” also contains four matrices that calculate profits and losses so investors can determine cut off positions in advance to protect profits and/or losses.  The report also looks at how to switch time horizons for greater safety.

The first way the Dip adds extra performance is with leverage.

The second way to enhance performance is to maintain the leverage in poor value currencies.   Choosing which currencies to borrow is almost as important as choosing which metal to invest in.  The examples in this report have shown loans made in British pounds.  Other times it has been better to borrow Japanese yen, Swiss francs, once Mexican pesos.

Currently the best currency to borrow is US dollars.

The Platinum Dip 2018 report reviews each currency and which is best to borrow now and what to watch for.  Sometimes it is best to borrow a second currency and pay off the initial loan in mid stream.

Rising interest rates make the US stock market highly dangerous in the short term. “The Platinum Dip 2017” shows how to create a safe, diversified good value stock portfolio and use it to generate much higher returns with a little controlled speculation in platinum.

Learn how to get platinum loans for as low as 1.58%.  See why to beware of  certain brokers and trading platforms, how to choose a good bank or broker and how platinum profits are taxed.

The report includes a complex comparison of gold and silver with other costs of living from 1942 to today to help determine the real value of gold, silver and platinum.

Finally, learn why and how to use advisers to manage profits from the gold and silver dips.

Current circumstances could cause the price of platinum to rise rapidly at any time.  Do not delay reading this report.

The Silver Dip sold for $79 in 1986.  Due to savings created by online publishing (we eliminated the cost of paper and postage), we are able to offer this report for $39.95.

Order now by clicking here.  Silver Dip 2017  $39.95

Get the Silver Dip 2017 FREE when you subscribe to the Purposeful investing Course.  Act Now.

Subscribe to the first year of the Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.  You also receive the $39.95 report “Silver Dip 2017” FREE.

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Gary