Should I sell my gold ?
Is this a good time to sell your gold? This depends on whether the price of gold will continue rising....
A long-standing rule of thumb is that an ounce of gold should equal the cost of one high-quality man's suit. This metric would suggest that at todays price of $1250.2 an ounce gold is probably overvalued.
By historical standards gold is expensive relative to
and housing
the supply of gold is steady but
demand is falling
...with one important exception:
the gold ETFs,
which are being bought by speculators and hedge fund managers as an insurance against inflation. If this inflation does not materialize, the gold price could fall dramatically.
Gold is therefore looking like an increasingly risky investment. The last bull market in gold lasted 10 years so assuming this one started in 2000 gold may have peeked. So should you sell all your gold? Not necessarily. Adjusted for inflation, gold is still below its all time high and and the Dow Jones versus Gold ratio is indicating further increases in the gold price. However, if you need to raise money to pay off debt you could consider selling some of your gold.
How has gold performed?
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The “Real” Reason for Gold’s Rise
The main driver for gold prices is real interest rates. Real interest rates are calculated by taking the nominal rate of interest (what is actually paid) and subtracting inflation.
When real interest rates are below zero, cash and short-term investments lose money. In this environment it’s nearly impossible to find decent yields. That’s why savings accounts, CDs, and bonds are paying next to nothing. As a result, savers and investors are forced to turn to other assets which offer returns above inflation. Historically, when real interest rates are negative, they turn to gold and gold goes up. When real interest rates are positive, gold goes down.
The key thing is how long real interest rates can stay negative. In the 70s gold boom, gold’s ultimate high was determined not by how low real interest rates fell, but how long they stayed there. And the big gold correction in the mid-70s came when real interest rates were trending back towards positive territory.
When will the gold bubble burst?
“When even shoeshine boys are giving you stock tips, it’s time to sell” - Joseph P. Kennedy
An old Wall Street saying has it that when everybody’s getting into the market and even the shoeshine boy is giving stock tips (or the barber/hairdresser or the taxi driver or the waiter or the bartender), then it’s time to sell. Supposedly, Joseph P. Kennedy knew that it was time to get out of the market in 1929 when his shoeshine boy began giving him stock tips.
The gold market is slightly different. The dumb money in stocks may be the shoe shine boys, but with gold it is the central banks. Bankers and money guys don't like gold.They are the last people in the world to want to own gold, and when they start buying it this is an indication that the market has peeked. Equally when they sell gold this is a good buying opportunity.
Silver
If you are investing a small amount of money it is worth considering silver as an alternative to gold. $1000 will buy you about 60 new uncirculated silver coins. In the event paper dollars become valueless, smaller value coins will be easier to spend. Imagine trying to buy $100 worth of groceries with a gold coin worth over $1,000...
Historically the gold/silver ratio has been about 16:1. It is now over 60:1 which leads many analysts to conclude that silver is undervalued. However the 16:1 ratio was based on Western valuations and many Asians, especially the Chinese, are much more interested in gold than silver so there is reason to think that the price ratio may be redundant.