July 11th, 2008

Gold (GLD) and Silver (SLV)

No telling how the day will end up but right now, before the open, it doesn’t look good unless you’re short the market or long gold, silver and oil. It’s a strategy that’s been working (at least it’s kept you relatively safe) since early this year.

Prof. Aswath Damadoran, in his book “Investment Philosophy” has some interesting references to studies on market timing that, given the state of the market, needs to be mentioned. For example:

  • as much as 93.6% of the variation in quarterly performance by professionally managed portfolios could be explained by the mix of stocks, bonds and cash.
  • an investor who could have missed the 50 weakest months of the market between 1946 and 1991 would have seen his annual returns almost double from 11.2% to 19%.
  • asset allocation (the mix between cash and stock) has important consequences for your investment returns and its importance increases with your time horizon.

I goes without saying but the key to making switching between stocks and cash work for you is being able to tell the difference between a good market and a bad one. I believe my Market Timing Indicator (MTI) has encouraged me (and to you readers who have followed this blog since March) to stay mostly out of the market this year and to have a portfolio return of just shy of -4.0% while the S&P 500 is down -14.64%, year-to-date.

Well and good but what does the MTI say now? It’s almost easier to point to what it doesn’t say and what it doesn’t say is to get back in the market. No “catching knives”, no “bottom fishing”, no “catching a rebound”. This is a dangerous market and the best place to be is on the sidelines.

The current concern is what appears to be the immanent demise and Federal bailout of Freddie and Fannie. But this increases the concern for the prospect of huge inflation on the horizon. Just look silver (SLV) again starting to climb:

and gold (GLD):

In the short run, it’s fairly safe to anticipate back to the March highs in both precious metals. But if the movement since the beginning of the year has been a consolidation, then a 50-70% move from these levels is possible.

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