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The Smart Money Is in Precious Metals, But a Local Top Is Close


Learn when to be in, when to be out, and how to do it.

At Sunshine Profits, we're holding gold and we find ourselves in very good company with some of the world's biggest players. The smart money is definitely in.

Central banks are net buyers of gold for the first time in 22 years.

According to a report by precious-metals research firm GFMS, for the first time since 1987, central banks around the world bought more gold in the second quarter than they sold. India recently bought 200 tons of gold from the IMF and it won't surprise anyone if China steps in to purchase the other 200 tons offered for sale.

Some of the world's most successful traders are in gold.

John Paulson's hedge fund holds a massive gold position in the SPDR Gold Trust (GLD) and large positions in gold miners.

Star hedge fund manager, David Einhorn, who predicted the fall of Lehman Brothers, used to stay away from gold for personal reasons. His grandfather was a gold bug who held on to his gold position for 30 years waiting for the US greenback to collapse and for inflation to run amuck. Apparently Einhorn now thinks that grandpa may have been right all along but just had his timing wrong. He initiated positions in gold for his fund.

"Being a patient investor is one thing. Being 'wrong' for three decades is quite another," wrote Einhorn in a letter to his investors. "To everyone's dismay, we believe that some of Grandpa Ben's predictions are playing out."

The smart money is in, but it's clear to me that the real fireworks will start when Main Street catches gold fever. The gold market is small. The market cap of all the gold stocks in the world is less than that of Microsoft (MSFT) or Walmart (WMT). So, when the public finally rushes into gold ... Well, that's when we'll be very glad that we got in early.

Speaking of getting in and out of the market, there are times (before local tops) when it makes sense to be in -- and out of the market at the same time. I believe that a word of additional comment here would be useful, as I get the feeling that it might be perplexing to read that it might be useful to do one thing (enter the market) with a part of one's capital and do the opposite (wait/sell) with the other part.

Generally, the action that one is supposed to take depends on their risk tolerance -- and consequently their portfolio structure and attitude toward money management.

Risk-averse investors should have more capital invested in precious metals also during corrections, while risk-loving speculators might be inclined to monitor market closely on a daily basis to catch even the small moves in the price of gold and silver.

Therefore, depending on your preferences, you'll need to monitor prices of metals in different time frames, and you will define different moves as "small" or "big".

From the long-term point of view, even $50 to $100 downswing is really small -- think about a chart with gold's rise from $250 to $5000 -- a $50 move is barely visible.
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Position in gold.
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