Why I'm buying gold and silver (mostly silver)


I’ve been long term bullish on gold and silver for at least a few months already.

Why I think gold and silver are in long term bull markets

I think inflation is coming.

  1. Massive rounds of global quantitative easing have finally caused the global economy to improve in unison. This is the first time since 2010 in which every single major economy is improving.
  2. With the U.S. economy already at or near full-employment, inflation will rise over the final 1-2 years of this economic expansion and bull market in stocks.

Historically, rising inflation is long term bullish for precious metals.
Here’s rising inflation in the late 1970s.

Here’s gold in the late 1970s

Inflation doesn’t even have to rise a lot for gold and silver to soar.
Here’s inflation the 2000s and 2010s

Here’s gold in the 2000s and 2010s

There’s another major long term bullish factor for gold and silver that never existed before: China is attempting to destroy the U.S. dollar’s reserve currency status with a Yuan that’s backed by the gold standard. Whether or not China succeeds is debatable. But either way, China is buying massive quantities of gold to back its Yuan with gold.
This is essentially a precious metals squeeze. Gold and silver (especially silver) are relatively small markets. These squeezes happened before with silver in 1979-1980 when the Hunt brothers squeezed silver from $5 an ounce to $50 an ounce. The only difference is that it’s not 2 brothers that are cornering the precious metals market this time. It’s China. No force has more cash in the world than China.
Silver is the more volatile brother of gold. Silver will soar much more than gold in a precious metals bull market.

Why I didn’t buy silver before

I like to trade leveraged ETFs. The problem with leveraged ETFs is that your timing has to be decent, otherwise you’ll lose a lot of money from erosion. So here’s the argument that’s been playing around my head for the past few months.

  1. Silver is hovering around $16-$17 an ounce right now.
  2. Silver will go up at least 10x if the bull market plays out (to e.g. $160-$170 an ounce). Silver’s historical bull markets are crazy.
  3. In that scenario, USLV (silver’s 3x long ETF) will go up at least 60x because compounding works in USLV’s favor.
  4. But if my timing is wrong and I’m too early on the bull market call, I can easily lose 80% of my money first before silver and USLV bottom.

What I decided to do

I firmly believe that inflation will rise in the final few years of this bull market. Historically, every economic expansion ended with rising inflation. It’s just that my timing might be a little off.
As a result, I’ve decided to just buy SLV, silver’s non-leveraged long ETF. If my long term case is correct, then I stand to gain at least 10x over the next few years on my silver position. This sounds crazy, but is it really?
We live in a world in which there is way too much cash. Investors and speculators don’t know what to do with all that money. I’m still amazed that speculators could push Bitcoin – literally thin air – from $100 a coin to $20,000 a coin in less than 3.5 years. That’s a 200x gain! So is a 10x increase in silver really ridiculous? I don’t think so, especially when the masses start to realize that major central banks around the world are all loading up on gold and silver.
These are crazy times indeed. It’s time to profit from the next bubble.

Position size

Position size and risk management are just as important to trading/investing as my market outlook. I’ve decided to allocate a mere 20% of my portfolio to SLV.

  1. If my long term case plays out, I stand to profit 200%.
  2. If my long term case doesn’t play out, I will cut my SLV position when the economy starts to deteriorate (i.e. inflation will turn into deflation). I will suffer a loss, but the loss will not have a significant impact on my portfolio because the position size is small.

These are my favorite types of trades. The risk:reward profile is telling us that the upside is massive (e.g. 10x) while the downside is limited.
I will slowly enter into SLV over the next few months. This is a buy and hold position for the next 2 years. I will only take my profits when I think the bull market in precious metals is over.

22 comments add yours

  1. Hi Troy,
    Your thoughts on going with the silver miners instead to get leverage?
    Rich

    • I don’t know much about silver miners, but I thought about buying GDX. I think GDX will outperform silver in the first half of this bull market and silver will outperform in the second half of this bull market.

  2. Hi Troy:
    Traditionally, I’ve been told that gold is a backup when the stock market goes down. Isn’t it something contradictory to be bullish on the market, and bullish on gold?
    Pardon my ignorance, as I don’t know much about Gold.
    Thanks.

    • That’s a common misconception which isn’t entirely true. Sometimes gold goes down during the stock market’s bear markets. E.g. gold went down during 2008 when the stock market crashed.
      Gold’s historical bull markets (1978-1980, 2002-2007, 2009-2011) occurred when the stock market went up.

    • Shorting an inverse ETF caps your gains at 100%. By being long, your gains can vastly exceed 100%.

  3. Hi Troy,
    You mentioned we live in a world with way too much cash. Is this a result of QE? Do you think the Fed unwinding QE will change the current situation?
    Thanks.
    Alex

    • Yes, this is partially a result of QE. But it’s also partially due to China. Never before in history have we had so many millionaires/billionaires leave a country (ie. China) and move to other countries (US, UK, Canada, Australia). That’s why we’re seeing so many real estate bubbles around the world. London, LA, NY, Singapore, HK, Sydney.
      I think the unwinding of QE will cause more volatility, but I don’t think it will reverse the bull market in stocks. The instant SPX makes a significant correction, all these central banks will go right back to QE.

    • When you buy physical silver, you pay a 5%+ premium. Then you pay another 5% premium when you sell your physical bullion. And then you have to pay for storage costs (unless you only buy a little bit).

  4. Hi Troy, I haven’t done any backrest, but feel that Buy 3x Silver and -3x Gold might have better capital efficiency and less risk?

    • That’s one way of trading this. But my silver position is just a long term investment. Not really a trade.

    • NUGT and other triples face the same erosion problems as USLV. In fact, NUGT has a bigger erosion problem than USLV because it fluctuates more on the intraday.

  5. Dear Troy,
    Out of curiosity do you have a plan on how you intend to enter slowly over the next few months? i.e. , do you plan to buy dips, or simply continue to add to your position as your view on a silver bull market is more and more validated?

    • I’m raising some cash by selling a bit of real estate. Will buy silver immediately once that happens. This is a long term investment, so a $1-2 difference in silver isn’t going to make much of a difference if silver goes above $150 (which sounds preposterous, but could happen).

      • It does sound preposterous, but anything is possible. Do you think that the world banks’ signaling a more aggressive stance on raising rates could keep a rally in check, however?

        • I don’t think so. Central banks always raise rates too little, too late. CB’s will only hike rates aggressively enough once inflation has gotten out of control (e.g. Paul Volcker).

  6. Thanks Troy for this analysis and your rationale, deeply thought provoking. Excellent write up.
    What’s your take on the GLD/SLV ratio?

    • I don’t use the GLD:SLV ratio, so it wouldn’t be appropriate for me to comment on that. But in terms of the gold:silver ratio, it’s long term bullish for precious metals. The gold:silver ratio should fall over the next few years, which means that precious metals are going up (because silver always goes up more than gold in a bull market).
      Kind regards,
      Troy

  7. Hi Troy, as you mentioned in the article “I will cut my SLV position when the economy starts to deteriorate (i.e. inflation will turn into deflation).”
    Does this mean that the timeline for SLV investment would be up to 2019? (As we’re expecting significant or bear market in 2019, with deteriorated economy.)
    So if we were at 2006, you would cut SLV in Feb. 2007, and re-enter in Mar 2009, based on your Medium-Long Term Model for stocks?
    April 2, 2003 – February 15, 2007
    S&P buy $880.9
    S&P sell $1456.81
    March 19, 2009 – April 9, 2010
    S&P buy $784.04
    S&P sell $1140.45
    Or you would only use Inflation as the indicator, and would ignore the rapid falling inflation in 2008-2009, and hold all the way to 2012?

    • It would be a mix of both. Here’s the process:
      1. I wouldn’t sell silver the instant I see economic deteriotation.
      2. I’d sell the SLV after the stock market has already topped and when it’s very clear that the economy is about to enter into a recession.
      3. “Very clear that the economy is about to enter into a recession” is usually around the time when inflation starts to fall.
      So if the stock market tops in the second half of 2019, I will sell my SLV sometime in the first half of 2020. But keep in mind that the market “top” in 2019 might only be a significant correction. Perhaps the bull market will top in 2020. That’s why I’m just taking this one step at a time. The model’s bear market signal is not fixed in stone. It changes as we get new data.

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