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Gold & Silver Investment Methodology: What's It All About?

In each and every Premium Update (PU) we present a clean-cut suggestion to buy, sell or hold metals, which suggestion you will be usually able to find in the Summary of the PU. In one glance you are able to take in our opinion on the subject of the possible direction the market will move both in the short-term and in the long-term. The reasoning behind such a suggestion is laid out in the PU and it stems from thorough research we conduct on a regular basis.

Even though it is not obvious for the Reader, the provided explanations are a result of a time-consuming process of carefully narrowing down available information linked with metals to the most important factors that might influence the prices in the future. In this text we would like to outline a journey we make on daily basis – from the general look at the markets to concrete investment suggestions.

Flood of methods

Just as Eric from our video, you may feel overwhelmed by the abundance of approaches towards precious metals investing. It is simply impossible to keep track of all of them and choose the one best for a one-off investment decision. What is more, following too many of them may cause you lose focus and impede your speed of reaction both of which can be deadly for your capital in the fast-changing world of precious metals markets. This is when we come in to help you.

Years of analyzing the precious metals market backed up with years spent as support for precious metals investors give us the confidence necessary to recognize what is driving the market at the moment but also the experience which does not allow to neglect the risk involved. Because of that, we are able to sift the signals coming from the market and tell gold from junk.

Time horizon

From what we have observed, it usually is risky to stick to one investment method only as it might mislead you into bad decisions. This is pertinent to sticking to one time horizon as well. As a matter of fact, it is usually reasonable to divide your portfolio into two parts: the core investment part and the satellite speculative part. The core part is the one you would want to make profit with in the long-term thanks to the long-term trend in price changes. Such an approach is a clear investment as you are bound to keep your position opened for a considerable amount of time in order to realize the profit.

The speculative part is quite the contrary. You would open a speculative position with short-term gains in your mind and with the awareness that even though potentially more profitable than investments, speculation is also way more risky.

In typical circumstances investments should account for 60-90% of your portfolio, the rest being speculative positions. This way, you may enjoy a possibly higher rate of return than in the case of putting all of your money into investment positions and at the same time you may not have to be afraid of severe losses in the short-term.

Such a distinction between the investment part of your portfolio and the speculative part of it will be useful to explain the factors we take into account in our analysis.

Where are we going? – Fundamental analysis

When we take a look at the precious metals market, the first thing we try to assess is the long-term trend. It is extremely important to make sure that the long-term outlook is bullish – you would not want to invest a bigger part of your portfolio in a declining market. How do we exactly do that? We look at the fundamental factors – factors strongly connected with common sense and with basic laws of economics.

Not all of the breaking news turn out to be true or relevant – this is why we verify the inflowing information on a regular basis.

First of all, we examine the background – the current economic situation, rules and regulations, the monetary policy, currencies, the stock market, the international exchange etc. Based on the information coming from these areas, we try to determine what the most likely long-term outlook for the precious metals market is. A huge amount of common sense is required here as some of the information coming from the markets may be misleading.

Breaking news in the media, statements of the officials, gossip circling internet forums – this is a true jungle of information. We always aim to confront them with each other and to detect any inconsistencies. Thanks to that we may restrict our analysis to the elements that truly might have an impact on the demand and supply relations and therefore might influence prices in the long-run. This is extremely important as most of your capital would be located as investments in long-term positions.

What will happen next? – Technical analysis

Fundamental analysis gives us the idea of where the market will eventually go and therefore is of primary importance for long-term positions. On the other hand, it does not explain short-term price changes. The short-term prices or the short-term trend for metals might be different from what fundamental analysis suggests. Because of that, we need to extend our research beyond the fundamental factors and try to identify other drivers of the prices of metals.

This is the moment in which we resort to technical analysis – we analyze historical trends and compare the current situation to the past price changes. Thanks to that we are able to identify possible short-term price change scenarios. In this sense, technical analysis offers help in predicting short-term deviations from prices suggested by fundamental factors.

The assumption that what has happened before is most likely to occur in the future allows us not only to anticipate short-term turning points but to anticipate possible price levels at those turning points. However, the situation on the metals market may change from one day to another. This is why we reassess it day after day. Tracking prices on a daily basis and comparing them with a set of price paths from the past is a time-consuming process. When you add this to the fact that we include other factors like volume in our technical analysis, you will understand how much time we spend on formulating our opinions and why we send Market Alerts, which inform about relevant changes in the forecasts.

Trend lines, rallies and declines – this is what technical analysis is about

Technical analysis is important as it may suggest a proper moment to open speculative positions. Although these positions would be only a small part of your portfolio, the use of technical analysis enables you to maximize your profit from this part and (to some degree) from the whole portfolio. This is why we include it in our analyses and present suggestions to open or close short-term positions.

What if…?

As we have stressed before, the process of verifying the fundamental factors and then the process of analyzing the trend are time-consuming and complementary. A question arises: are they enough? We believe that not and will explain why right away.

There are some periods during the year in which factors other than fundamental and other than simple trend come into play. Most precious metals investors know the saying Sell in May and go away, which suggests that the summer months are not particularly profitable. This is neither a strictly fundamental factor, nor a one that stems from technical analysis. But this is just one example – there are numerous others factors that drive prices of metals, for instance: the expiration of derivatives, higher activity on the market in particular days of the week or the business cycle.

We have not only included the aforementioned factors in our analysis but also gone one step further – we measured some of these phenomena in quantitative terms. Thanks to that you will know, which month is the most profitable one, how gold reacts to changes in the price of the U.S. dollar, if charts of prices of metals have a fractal structure and much more.

The Correlation Matrix is one of our basic tools – it helps you confirm information from other sources

We have written before that diversifying your portfolio might increase your profit. This can be extended to our analyses – the more thorough research we conduct, the more factors we examine and the more tools we build, the more likely it is that we identify the real direction the market will go, either in the short-term or in the long-term. What is more, various factors and tool may confirm each other’s findings or, on the contrary, invalidate their suggestions. So, we are able to say which factors may be important in the future and which may play a minor role.

The decision

The abovementioned approaches to predicting prices of metals are continually present in our analysis. We describe fundamental factors, discuss recent changes in trends, resort to numerous quantitative tools and much more. You are able to take a close look at how we come to our conclusions and decide whether you share our current opinion regarding the market. At the end of the day, it is you who decides what to do with your capital. Because of that we strongly recommend you to conduct your own research and always rely on common sense – nobody knows what might work out for you just as you do.

We hope that our methods facilitate your decisions. This is why you will always find a short summary at the end of each Premium Update. This is the part of the PU in which we provide our opinion on what the outlook for the market is. However, we encourage you to delve into our analysis – nothing will make you as familiar with our reasoning as reading the whole PU.

But why restrain to the PU? In our Tools section you will be able to find various instruments that help assess the situation on the market. As the size of the PU is limited (you wouldn’t want to go through a PU as big as 100 pages, would you?), you will discover there many information complementary to the PU. Maybe you are interested in performance of particular stocks or indices? Maybe you would like to know if the expiration of derivatives might affect the price of a particular company this month? Or maybe you just want to check the tomorrow’s predicted price of gold? This is precisely what the Tools section is for. And for much more.

Przemyslaw Radomski - Founder of Sunshine Profits

Przemyslaw Radomski, CFA (PR) is the founder, owner and the main editor of SunshineProfits.com

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Dear Sunshine Profits,

gold and silver investors
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