Sunday, January 09, 2011

Rebalancing Leaves One More Chance at Sub $30 Silver

Gold and silver have taken hits in January. One reason is unexpected, and unlikely to last, strength in the dollar. The other reason is something called portfolio "rebalancing." Every year around this time managers rebalance their client's portfolios.

For example, suppose you had a client who at the beginning of 2010 had a portfolio that was 50% stocks, 40% bonds, and 10% metals. That is a conservative mix, but lots of portfolios look about like that. Over the course of the year stocks and bonds stayed fairly stagnant, but gold soared 26% and silver 80%. Now its time to "rebalance" that portfolio. In other words, make the ratios of the assets look like the 50/40/10 that the client specified.

Since gold and silver rose relative to the other two asset classes what that means is selling gold and especially silver. Their rising values made the same amount of metals worth a significantly higher percentage of the portfolio. They will need barely more than half the silver they had going into the year to maintain the same percentage of the portfolio value. So they sell.

Now imagine that scenario repeated one million times. The bottom line is a lot of gold and even more silver is being sold this month almost on autopilot. They are being artificially depressed as a result of their past success. I would say this month is our last chance to grab some silver under $30 an ounce. Once the rebalancing ends, the underlying forces which propelled PM gains in 2010 will once again dominate over this temporary background noise.

2 Comments:

Anonymous Rick said...

The first half of this year may not see much of a rise in gold and silver but from what I am reading the second half of the year can bring about some shaky economic times. What are your predictions on the price of gold and silver in 12 months?

3:57 AM, January 10, 2011  
Blogger Mark Moore (Moderator) said...

I stick with my prediction of near $50 silver by the end of the year. Maybe when it tops $45 it is time to take some profits, maybe not. It depends on what other conditions look like then.

Gold will also go up, the elites know all paper is trash and the stock market is being held up by flash trading. In this town there are five places advertising that they buy gold. They are sucking all of the gold out of the general populace.

I have not studied the particulars on gold enough so I don't have a number prediction for gold, but if I had a pile of FRN notes I'd mix some in with the silver. Silver beat it 3-1 last year, but my best estimate is that their percentage gains will be much closer to one another in 2011.

5:03 AM, January 10, 2011  

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