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Monday, December 31, 2012

Silverv Investment Exit Strategy

This is the most challenging part about silver investment. The fact is, just like any other investment, no one can accurately predict when is the best time to exit the game (sell your silver). There are experts in the Internet are predicting silver price may go up to USD100/oz, USD 500/oz, USD 1,500/oz and some even predict silver price will go higher than gold.

There are several ways to benchmark what is a fair market value for silver price. The most popular ones as as listed below:
  1. Availability of silver above ground
  2. Gold silver ratio
  3. Real estate silver ratio
  4. Dow Jones silver ratio
Among all the benchmark mechanisms, gold silver ratio is one of the best ones. If you find the others benchmark mechanism are troublesome and hard to calculate, only stick to gold silver ratio, you won’t go wrong too far.

You may ask, why can’t I give you an exact price when you should sell? Imagine this, I predict silver price will peak at RM 800 / oz. Assuming that you put your trust in me and you patiently wait for 1 oz of silver climb up to RM 800 / oz and silver price does goes up to RM 800 / oz in 201X year.
However, in 201X year, one bottle of mineral water cost RM 100 and one plate of chicken rice cost RM300. My prediction is still right that silver price went up to RM 800 but the prediction is totally useless. In silver investing, price means nothing, value means everything. So the conclusion is I cannot give you an exact price, however I will show you a more reliable method to determine the fair value of silver through gold silver ratio.

This is how you measure gold silver ratio. You divide the gold price per oz with silver price per oz.
This will tell you how many oz of silver is required to exchange for 1 oz of gold. For example:
Today gold price = USD 1733.52

Today silver price = USD 33.86
Gold silver ratio = 1733.52 / 33.86 = 51.19

Hence, today gold silver ratio is approximately 51. It means it takes 51 oz of silver in order to exchange for 1 oz of gold. This scenario is benefiting silver investors to buy low sell high.
Traditionally, gold silver ratio fluctuate around 16 : 1. It means it only takes 16 oz of silver to exchange for 1 oz of gold. Like any other investment, when the number goes too high, it must revert back to the mean. When gold silver ratio has gone too high, too long, it should go back to the mean (16 : 1). Interestingly, gold silver ratio will not stop at 16 : 1, it will go even lower before reverting back to the mean. The longer (and higher) a number is detached from the mean, the more aggressive it will bounce to the other direction before fluctuating again around the mean.

Movement of gold silver ratio reverting back to mean.
Point A is where gold silver ratio would peak. Point B is where mostly conservative investors would exit. Point C is where smart investors would exit. Timing Point C is the most challenging part of silver investment. I would not advice anyone when Point C would come or at what ratio people should he exit because if situation didn’t turn up well, he is going to blame me for ruining his financial life. I will only “share” with you what I PERSONALLY would do.

I personally believe ratio 10 : 1 is a totally logical number but I’m not going to bet my luck on it. I would sell of 50% my silver at ratio 12 : 1. My next target is 10 : 1. If the ratio hits 10 : 1, I will again sell off another 35% of my holding. Lastly, I would aim for ratio 8 : 1 where I will finally dispose all my silver.

Note that the above is a general guideline exiting silver at 12, 10 and 8 . There could many other external factors that lead me to alter my plan in the future. For example, if a genius scientist invented a replacement material for silver in industrial usage, I might adjust my ratio to 50% at 18 : 1 and another 50% at 16 : 1. Or another scenario, imagine World War 3 happens, I will hold my silver tightly and I might only sell 20% at 8 : 1, another 20% at 4 : 1 and continue holding the remaining until the war ends. My point of illustrating this is, do not follow blindly on the 12, 10, 8 ratio. Keep yourself updated with the world economy, silver market and anything relevant to it. In no time you will be able to determine for yourself when is the best time and best ratio to exit. Alternatively, you can always stick around my website, I will update my website frequently to share my insight in silver investment.

Having said that, if there isn’t any extreme event happens that affect silver market until the next decade, ratio 12, 10, 8 would still be a good indicator.

This is a sample chapter from eBook titled Practical Guide for: Investing Silver in Malaysia. Check out the full version eBook for short term and medium term exit point where I give you the exact price to sell. Download the full version

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