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Van

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Hello GEI.. I'm back. A little older, a little wiser.

 

Starting a new Journal thread, which will be ongong:

 

2014 Journal: http://www.greenenergyinvestors.com/index.php?showtopic=18771

2013 Journal: http://www.greenenergyinvestors.com/index.php?showtopic=17213

 

will be talking about markets, investment ideas, personal finance, fitness, health & wellbeing. The last couple of years have been of tremendous personal growth, and I have new perspectives on all these ideas and how they can all link and enforce each other.

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In the last couple of years I have been very much into endurance sports, health & nutrition.

 

I've run 3 marathons, 1 ultra marathon, and done two solo 24hr skate races. Currently in training for another marathon in 5 weeks time.

 

I think I started a couple of threads on health/nutrition etc on GEI. You can read about some of my adventures on my blog:

 

http://enduranceskating.com/

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I am watching UK:BARC (Barclays) and DE:DBK (Deutsche Bank) very closely.

 

They are collapsing.. day by day. I feel the next crisis is here.

 

The fallout will be Lehmans on Steroids.

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I am sure we're all familiar with this chart of the Gold/Silver ratio:

 

gold_all_data_silver.png

 

 

In devising a strategy of how to buy precious metals the rules I will follow are simple:

 

- Invest a fixed £ amount each month

 

- If the ratio is above 80, silver is extremely cheap; begin to liquefy gold holdings and use the proceeds to buying extra silver

- When the ratio is between 80-65 buy silver only

- When the ratio is between 65-50 buy both gold & silver

- When the ratio is below 50, buy gold only

- When the ratio is below 35, gold is relatively cheap; liquefy silver holdings and use the proceeds to buy extra gold

 

So if, as I think, we are about to resume the secular bull market in PMs, I would expect silver to become more expensive relative to gold in the coming few years.. I will initially find myself buying just silver, and then at some point gradually begin to add gold, then buy only gold, and then swap my silver for gold as we approach the blowoff stage.

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Good luck on the new thread, Van.

I'll be reading it.

 

"will be talking about markets, investment ideas, personal finance, fitness, health & wellbeing"

 

It is a good wide range of Topics.

 

Any markets you expect to be following especially closely?

(Especially interested to see if there are any "surprizing" ones you might cover)

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Thanks DrB. Financial independence is very important and remains a long term goal, but good health is even more important, and I would say that I've greatly enriched my own life by taking health and fitness much more seriously in recent years. I want to be that octagenarian who's still running marathons with a smile on his face in 40 years' time. That would be a life well lived.

 

The great thing is that getting fitter also gives you new perspectives on markets and trading. They say that ultra-marathoning is all in the head, as with trading. The key to success is discipline, having a plan and executing it. Having a physical outlet each day refreshes mental capital like nothing else. It keeps everything in perspective. Realising that money ISN'T everything, health and wellbeing take precedence, ironically make me a far MORE successful trader. I suppose that that is how it must be, and perhaps that is the key.

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That makes sense.

 

I hope you make some acquaintance with a new poster here called Vlad,

who has taken a huge interest in health issues - and also Ashllyne.

You will find several recent posts by Vlad here:

 

> A deeper look at dis-ease (lack of ease)

and

> Becoming Financially Independent & More healthy

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Nearly everything the mainstream advice says about health and nutrition is wrong and damaging in the long term. Big food and big pharma have conspired to promote model of healthcare that treats the symptom while promoting the disease. That is a great business model for them, and a terrible model for you.

 

Here is a GREAT video about the importance of vitamin D. Probably in one of my top-10 health/fitness videos.

 

D is for Debacle - The Crucial Story of Vitamin D and Human Health

Ivor Cummins

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Doing lots of research into precious metals at the moment.

 

I like Silver & Platinum the most.

 

 

Gold/Silver is currently at 79, a level it has roughly been at less than 10% of the time since the world went fiat.

 

Platinum historically is more expensive than gold, usually between x1.3 - x1.5. However the ratio has reversed in the last 2 years and Platinum currently trades at a 30% discount to gold. Very rare that this happens.

 

https://www.sharelynx.com/data/smgld/smgld50yrauplratio.php

 

And then there is the exotic stuff..

Palladium is often used as a substitute for Platinum in catalytic convertors, so it's price held up very well while the other PMs slide.. at least until last year or so, where it caught up.

 

 

 

 

And finally Rhodium.

 

How have we not really talked or written much about this? While everyone was creaming their pants over the Gold bull, Rhodium was in a complete bubble phase in 2007-2008, and has been falling ever since.

I'll just put it's long term chart up.

 

rd92-pres.gif

 

 

Dec 2003: $444

Jun 2008: $9745

 

a x20 increase in price.

 

And yet people are adamant that it could never happen in Gold or silver.

 

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx

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"Doing lots of research into precious metals at the moment."

 

have you seen the 20 year charts that suggest a rollover in Stocks and maybe an upturn in Gold?:

 

> http://www.greenenergyinvestors.com/index.php?showtopic=20632

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I am currently shorting housing stocks:

 

UK:BDEV

UK:BVS

XX:DJUSHB

 

I don't pretend that the technical setup is very well timed, but I just think this have crash potential over the next year. In any case, I see it as a hedge play, if the market does turn down then some of my property equity will be wiped out anyway.

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We've just hit new 1yr highs in the gold/siver ratio, and getting up to the 10yr high. Silver is SO cheap right now. We will look back on this period as a once in a decade chance to buy silver this cheaply.

 

Don't know how many standard deviations above mean we are, but it has to be right up there.

 

My original plan was to cost-average my silver-buying over the next 12 months, but I am revising that to front-load it.

 

365d_sm_gold_silver_ratio.gif

 

3650d_sm_gold_silver_ratio.gif

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I am currently shorting housing stocks:

 

UK:BDEV

UK:BVS

XX:DJUSHB

 

I don't pretend that the technical setup is very well timed, but I just think this have crash potential over the next year. In any case, I see it as a hedge play, if the market does turn down then some of my property equity will be wiped out anyway.

 

 

Strong down day in UK builders despite FTSE bounce.

All 4 housebuilders in the FTSE100 are the biggest fallers of the day. Presumably the markets are scared the unlimited supply of immigrants to prop up the market is about to dry up in the event of a Brexit.

 

 

Barratt Developments PLC 560.00 -24.50 -4.19

Persimmon PLC 1,973.00 -89.00 -4.32

Taylor Wimpey PLC 175.00 -8.70 -4.74

Berkeley Group Holdings PLC 3,203.00 -160.00 -4.76

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Gold/Silver ratio is now at 81.3.

 

I have been crunching the numbers.

 

Since 1968 when Gold and silver had their price fix removed, the ratio has been this high in 39 months (out of 577), which is 6.76% of the time.

 

As the number goes higher the time spent above that level looks like this:

 

 

 

GSR | Months > above | % of time since 1968

80 42 7.3%

81 39 6.8%

82 34 5.9%

83 32 5.5%

84 28 4.9%

85 25 4.3%

86 22 3.8%

87 21 3.6%

88 20 3.5%

89 17 2.9%

90 15 2.6%

91 12 2.1%

92 8 1.4%

93 6 1.0%

94 3 0.5%

95 2 0.3%

96 2 0.3%

97 2 0.3%

98 2 0.3%

99 1 0.2%

100 1 0.2%

101 0.0%

 

 

2 standard deviations is represented by gold/silver of >84.5

2.5 standard deviations is represented by gold/silver of >92.9

3 standard deviations is represented by gold/silver of >95

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Works for me... I agree that Silver looks too cheap, relative to Gold

 

I have begun to sell some gold, and replace it with calls on SLV.

 

The idea here is to keep the upside in precious metals, and maybe get more upside, and to have some real downside protection

 

Gold-toSilver2_zpsmprngy43.png

 

Sell Gold $1233.7 : Buy Silver $15.14 :: r- 81.49
Sell GLD: $117.92 : Buy SLV : $14.41 :: r- 8.183

Sell July SLV Calls : $12.0 Calls : $2.66 : IV: $2.41 / TV: $0.25
SLV at $14.66 (Strike + Prem) locks in what Silver Price?

 

Silver-toSLV_zpschjzrlnu.png

Today's ratio of Silver/SLV is (15.14 / 14.41 = 1.0507)
I expect that ratio to rise by 1% every three years (to cover SLV mgmt, storage, etc)
That's 1.00% / 36 = 0.028% a month. So that's 5 mos : 0.028 x 5= 0.14% x 1.0507 = 1.0522

.

So: The July $12 calls lock in : $14.66 x 1.0522 = $15.42 (or 28 cents higher, + 1.8% higher)
If Gold stays where it is now ($1,233.7), and Silver is: $15.42: the ratio locked in would be 80.00

In effect, the high ratio, helps to pay for the Time Value in the SLV Option

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So here is a philosophical thought for the day:

 

What is the cost of production for silver?

 

Various estimates put it at anything between $9 - $25/oz.

 

With spot price at $15, and bullion at $17, it's fair to say that you could be buying a silver coin for a few dollars more than it costs to mine (never mind hidden costs like exploration, licences etc which probably don't figure in some of the lower estimates), and even a chance that you are buying it for less than it's overall cost of production.

 

How does that compare to say.. a $3 Starbucks coffee? How much R&D, sweat & effort went into cultivating a few coffee beans, milk & cream? I would wager less than 20 cents.

 

Yet hundreds of millions of people will happily pay $3 for a coffee and wouldn't buy a silver coin for $17.

Crazy world.

 

http://www.forbes.com/sites/kitconews/2013/07/10/feature-is-it-sustainable-to-mine-silver-in-this-current-price-environment/#23e1fcc760ff

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Been a very good few weeks.

There are two factors that are driving me to front-loading my silver buying.
First, there is potential for the Estonia VAT loophole to close by July this year. If so, this will raise premiums by as much as 50p/coin.
And secondly, everything points towards us being at the start of a new bull market.
So, by taking advantage of some 0% credit offers, I'm looking to really load up over the next 4 months or so, and have already accumulated far physical PM than I had originally planned by this stage.
Bought a load of silver off a private seller - got it for £15.5 per oz, but that includes quite a lot of semi-numismatics which are worth a considerable premium. He was selling as he was buying as much GOLD as he could, impressed by the recent activity in gold. With the GSR at 83 on the day we did the sell, I bit his hands off.

 

The trading account has returned some useful cash. I have now taken profits on most of my positions as I'm going on holiday next week and wish to enjoy it rather than worrying about my positions. Happy to let a few small positions run over this period. I believe that I'm slowly improving as a trader.. much more patient with my winners, and cutting my losses early. It may be that an approach that combines buying the physical while trading the paper is the combination that works "best" for me. CityIndex has recently introduced a new trailing-stop feature, which I really like and I believe has let me bag a bit more profit by catching moves, though I do have a tendency to set the stop too tight and get whipsawed out of good positions.

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I have been doing a lot of data analysis and work on gold & silver prices since 1968.

 

Firstly, a word about the Gold/Silver ratio (GSR), because I have changed my thinking on this and it's predictive power in the last few days. It is my opinion that the GSR will likely never drop to the levels we have seen in the past, below 20:1 like we saw in 1980 and back in the late 60s.

 

Why?

 

Because the GSR, least we forget, is simply a price. It is the price of a a fixed weight of gold as expressed in multiples of silver. And like all prices, in the long term it is determined by fundamentals, not by historical levels. We understand that the ratio of AAPL as priced in USD will likely never return to levels it was 20 years ago because of fundamentals, so it is with Gold as priced in Silver - while they share common characteristics, it is likely that one of them is better suited to the monetary requirement as a store of value, and therefore outperforms everything else over the long term. Good Money Appreciates. Hence, that is why we have seen the GSR move higher in more recent decades and hit 80 and higher at every few years as gold has outperformed silver by 7.7% vs 4.7% annualised since 1968. It is not likely that this is a fluke or it will means-revert. Rather, Gold outperforms because it is better suited as a store of value. Nike shares outperforms Reebok shares for the same reason. Gold should continue to outperform silver as a store of value in the very long term, and therefore we should expect to see new highs in the GSR in the future. Maybe not before it has moved back to fair value in the short term, but the fundamentals are working in its favour all the time.

 

So, in conclusion, the historical mean of the GSR since 1968 is 54, but this is not very useful or meaningful just to look at the average price of the whole dataset. It is far better to use a moving average to determine current fair price, and the current price above/below that MA to gauge how cheap or expensive gold is in terms of silver.

 

And the good news is that if you leverage that and put it into an investment/allocation model, you can make far better returns. I have devised and backtested various buy/allocation strategies for gold & silver, and the results are quite startling if you can identify the points where the price (GSR) moves past an extreme level from it's moving average. The beauty of is that it requires zero predictive power as it is all statistically driven. You simply buy gold & silver, or just gold or just silver, or occasionally swap gold for silver or silver for gold, all based on the level of the GSR from its moving average.

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"You simply buy gold & silver, or just gold or just silver, or occasionally swap gold for silver or silver for gold,

all based on the level of the GSR from its moving average."

 

By this indicator, what was the most recent trade,

and what do you anticipate will be the next trade?

 

I have been shifting out of my Gold position, and into cash (while retaining some long term holdings)

I am anticipating a drop in Gold prices into early April - based on the 4-6 months Cycle.

 

I also have some April GLD Puts, and some June DUST calls

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Key points of my model:

 

I assumed that the investor would strive to set aside 26% of their salary each month to buy PMs. Why 26%? Because, that is the amount that would need to be set aside for the average person to buy 0.75oz of gold per month on a historical basis., and it is a fairly realistic number that I believe should be achievable to most people. I could have gone for something lower like 1/2oz, but that would have made the rounding lumpier in the monthly calculations. Problem with gold is that it is difficult to buy fractionally without rounding issues coming into play.

 

Gold has returned 7.74% annualized since 1968

Silver has returned 4.57% annualized since 1968

 

In the first scenario, I asked what would happen if you just bought a fixed weight of gold each month regardless of price? If I bought 0.75oz of gold without fail every single month then I would have laid out 26.2% of my income and be holding 434oz of gold with a total USD value if $545,000 today. There are also a few months where this amount of gold in USD is above an entire month's wages, making it very difficult to maintain such a strategy.

 

Repeat this with silver, buying 35oz each month, and because silver has underperformed gold, I would be holding 29,235oz of silver with a USD value of $303,000. Not a great performance.

 

 

A better strategy would be to buy a fixed dollar amount each month - this is known as cost-averaging, and in the long term is a mathematically proven way to lower your average cost and outperform the market by taking advantage of natural price movements to buy more when the market is cheap, and less when it is expensive.

 

If I DCA 26% of monthly income into buying gold, I end up with 547oz of gold, worth $675,000.

And likewise, if I DCA 26 of monthly income into buying silver then I end up with 29,235oz of silver worth $437k.

 

Note that a DCA strategy outperforms a fixed-amount strategy by 26.24% for gold (675k vs 534k), and by a whopping 44.51% for silver (437k vs 303k). Silver is better able to take advantage of the DCA strategy by virtue of it's greater volatility. Nonetheless, even a DCA strategy in silver cannot match either strategy for the gold-only portfolio. Silver just can't keep up.

 

 

My next scenario was to construct a model where you would buy gold and|or silver when the GSR moved away from it's historical mean. Playing with different ratios of gold:silver, and when to only buy gold, and when to only buy silver, I was surprisingly unable to make the model outperform the DCA-gold model. At best, it would only match it. This is simply because of gold's outperformance - you would have been best to just buy as much gold as possible at nearly all times, and the few times where you would be buying just silver are not enough to make hardly any difference. At best the model returned 3866oz of silver and 503oz of gold with a value of $677,000.

 

 

Next model was similar to the one above, but added an extra upper/lower boundary where you would swap gold <-> silver and vice versa when the boundary was breached. I played a lot with the boundary levels, and at best the model returned 25762oz of silver and 268oz of gold with a value of $716,000.

 

 

Phew.

 

Now I took it one step further. Rather than use standard deviations away from the historical mean of the entire dataset, I calculated the boundaries using standard deviations away from the moving average of the GSR. This is represented in the Upper/Lower boundaries 1 & 2 in the chart - a bit like bollinger bands. This created far better signals for when to buy gold only, silver only, and when to swap one for the other. As you can see, swap signals are not a frequent occurence, happening only every few years.

This model generated a big jump in returns - delivering 16059 oz of silver and 1882 oz of gold, with a total value of $2,563,000.

 

 

 

Lastly, I wondered what would happen if I built in underweight/overweight amounts based on the price of Gold vs the average wage. In the dataset, an average year's wages as been enough to buy as much as 90oz of gold, or as little as 15oz. So I built a weighting model which indicated when to double your buying or to halve your buying based on the Wage/Gold ratio breaching moving a distance away from it's moving average. This is is shown by the 2nd axis which shows the periods when you should target buying more, and when it is prudent to scale back your buying. The overall contribution from average wages was still 26%.

This is the final model and delivered further returns, resultin in 1880oz of silver and 2442oz of gold, with a total value of $3,016,000.

 

 

 

 

*******

 

As mentioned, the beauty of this is that it all uses relative price of gold/silver & wages to determine how much of each to buy. No prediction is required to make use of it going forward.

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Been refining my long term precious-metals investing model, bases on monthly gold, silver & wages and relative ratios. The model would have returned > 5,000,000 usd if you had just followed it's mechanically generated signals. One of the parameters It took a lot of thinking to devise was when to hedge the portfolio. In the end I used the rate of change in the portfolio's drawdown as the technical indicator. This resulted in a monthly success rate of barely 50% that the metals went down when the hedge was in place, but on average the down months were bigger than the up months, so the hedge was still effective.

 

Interestingly, the model says that the portfolio should have been hedged every month from early 2012, and the hedge removed as of this month (March 2016).

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Is it based on Moving Average crossovers?

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Is it based on Moving Average crossovers?

 

Not so much MA crossovers, but rather prices moving away from the moving average, or a local min/max in the rate of change in prices. "Prices" being:

 

Gold/Silver (tells you what to buy and occasionally swap)

Precious metals/Wages (tell you how much to buy)

Smoothed Portfolio Drawdown (tell you when to hedge)

 

Very confident that my numbers add up, but currently condensing the spreadsheet to make everything more ordered is proving a bit of a nightmare. Will post the summary tables/charts when I've got it all pat.

 

 

Meanwhile, interesting to note that the silver is now starting to outperform gold - GSR is down from 83 to 78 in the last few weeks. I will start buying gold if it starts trending below 74.

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