Reading time: 6 – 10 minutes
When allocating capital a successful method for increasing wealth is to buy cheap valuable assets and if you ever sell them then do so when the assets are expensive or very expensive. But how can one accurately perform mental calculations of value? I recommend using gold as the numeraire. This allows one to get a clearer view of the relationship between price and value.
When allocating capital for longer than a millisecond or two, like the parasitic high frequency trading operations, one of the key metrics I use is the 200 day moving average.
The 200 day moving average is actually fairly simple. The sum of the close from the previous 200 trading days divided by 200.
WHY THE 200 DAY MOVING AVERAGE
The decision to use 200 days instead of 199, 50 or 500 is fairly arbitrary and dependent completely on the preferences of the capital allocator. I like the 200 day moving average because (1) the numeraire par excellence is so heavily manipulated that price and value are bifurcated, (2) a static point with an undefined entity like the FRN$ is meaningless, (3) a moving average provides a dynamic figure and (4) two hundred days is long enough to filter out short term abnormalities providing objectivity.
Consequently, while gold may be extremely volatile day to day the 200 day moving average shows a completely different picture; a nice gently sloping bullish trend line. In the financial markets, the 200 day moving average exerts a force much like gravity on the current price.
HOW TO USE THE 200 DAY MOVING AVERAGE
The 200 day moving average is merely a technical tool in the capital allocator’s arsenal. For example, on 14 July 2009 in Platinum Liquidity Increases I argued the case for why platinum was undervalued, a good buy and made a recommendation to purchase it. Of course, the foundation was the market fundamentals; low worldwide production, scarcity, lack of stockpiles, durability, fungibility, industrial demand and legal tender status. Then came the technical factor, the 200 day moving average of the platinum to gold ratio.
THE RELATIVE PRICE
One way I use the 200 day moving average is to calculate the relative price of an asset which is the current price divided by the 200 day moving average. Then I look at the relative price over time to determine when an asset is cheap or expensive.
I have found that during this secular bull market, gold in relation to FRN$ is valued by the market as cheap when its relative price is around .99, average value between 1.00 and 1.25, expensive between 1.25 and 1.35 and very expensive above 1.35. This can be accomplished by looking at the relative price and using standard deviations to form trading ranges.
Back in July 2009 platinum was trading at $1,118 per ounce with a 200 day moving average of 1.21 ounces of gold per ounce of platinum and a historical ratio closer to 2.0. Thus, with bullish fundamentals and being cheap relative to gold based on the 200 day moving average relationships I purchased platinum and it is currently at $1,540 per ounce with a 200 day moving average of 1.31. The trade has resulted in the goal: an increase of net worth when measured in gold ounces, the numeraire.
CHARTS TO HELP YOU QUICKLY VALUE PRECIOUS METALS
To be honest, I got tired of having to click a few times in order to quickly determine the 200 day moving averages for the various precious metals. Consequently, I had a gold price chart, silver price chart and platinum price chart (all three charts are available on this precious metals price page) created that contains the spot price, 200 day moving average and relative price along with a legend stating whether the metal is cheap, average value, expensive or very expensive based on historical trading ranges.
PLATINUM IS CURRENTLY THE BEST VALUE
With the precious metals I recommend accumulating physical metal on a regular basis, either monthly or quarterly. I recommend using a reputable coin dealer like Apmex for smaller purchases like a single Silver American Eagle or a trusted third party vaulting service like GoldMoney for larger amounts when you do not want the headache of guarding it yourself.
But how does one quickly determine whether they should buy gold, silver or platinum? Just look at the charts above, which automatically update to live prices, or visit the Metal Prices to get just the live charts. This article was published on 26 July 2010 when gold with a relative price of 1.0366 and the most expensive relative to its 200 day moving average while silver is in the middle at 1.0267 and platinum is the cheapest at 1.0109. This is confirmed with the platinum to gold ratio which is currently 1.303 compared to 2.0. Thus, if you were to purchase any of the precious metals at the time this article was published then I would recommend purchasing platinum because it currently appears to be the best value.
Remember, at all times and in all circumstances gold, silver and platinum remain money and currency. Consequently, you can always trade platinum for gold or gold for silver. The capital allocator’s goal is not necessarily to have the most amount of gold ounces but instead the highest net worth using gold as the numeraire.
CONCLUSION
When it comes to allocating capital I like to focus on intrinsic value. Buy low and sell high and I think money is made when you buy not when you sell. To accurately perceive value I use gold as the numeraire and the 200 day moving average to filter out daily noise and aberrations. Sure, as The Great Credit Contraction grinds on and being able to secure and multiple one’s wealth has become more difficult.
But there are always opportunities and deals to be made. The issue is whether you buy valuable assets on the cheap or when they are expensive. These precious metal price charts will allow you to quickly and easily discern the current prices of the metals and their relative value over the previous 200 days to determine whether to buy gold, silver or platinum.
DISCLOSURES: Long physical gold, silver and platinum with no position the problematic platinum, SLV or GLD ETFs.
More From RunToGold
Email
Print
 |
{ 5 comments… read them below or add one }
Well Trace, just when I was about to throw charts,graphs and teacups, head and shoulders and gobbledeegook out the window including 200 day moving averages since they are Wall Street oriented and lingo I don’t use you made a very simple explanation.Thanks.
Gravity I understand and since the fluctuations have been rather unremarkable over time in the metals market it sure makes sense to make money vs waiting to get asked to dance.
The BIG question is how do you recover the premiums over spot prices to make a profit? never mind, I woke up. Buy platinum and use the profits to get more Silver.
I am thinking about doing an in-depth series on the different ways to view one’s gold investment. For example, I think some gold investment, particularly coins, should probably never be sold, ever but instead passed down from generation to generation. Other gold investments, such as futures contracts, can be quick in and out trades where one can make a bundle very quickly. Yet other gold investments, like GoldMoney, can be treated like a cash balance or used as a currency for ordinary daily transactions. It has all to do with how one views their income statement, balance sheet and cash flow statement.
Great content you have here, thanks for the video of Dr.Vieira
About the 200 daily MA, I prefer 30 MA weekly:
http://stockcharts.com/h-sc/ui?s=$GOLD&p=W&b=5&g=0&id=p97034836844
This is a shorter MA: 30MA weekly is about a 144 daily MA as we have 250 trading days a year.
I agree wit Jay about the silver, besides that it is undervalued, it is also being used in production of goods. Since it is not recycled as gold is, it will become more in demand and price must follow.
Trace,
re “relative value” is backward … sb (price / 200DMA)
I like the way you think.
{ 5 trackbacks }