Sell gold and buy silver? | Silver Investment Tips

Question by Joseph S: Sell gold and buy silver?
Im a huge silver and gold bug and I currently about 33% gold and 66% silver. Im pretty convinced that silver will out preform gold by a long shot, even though they are both great investments. So, should I sell my remaining gold and go 100% silver or just keep my gold and hedge my bets against silver?

Best answer:

Answer by John W
When faced with two opportunities that you believe will make money, the choice shouldn?t be one or the other.

For example, if you had the opportunity to wager in two coin tosses, one with a payout of 2 to 1 ( you win twice your wager plus your wager is returned to you if you win and you lose your wager if you lost) and the other paying 3 to 1. Should you only wager in the more favourable 3 to 1 coin toss? The answer is no. The optimal would maximize the geometric mean of outcome which would be:

e^( ?probability of winning both coin toss? * ln( ?total wealth if you win both? ) + ?probability of winning 2 to 1 but losing the other? * ln( ?total wealth if you won the 2 to 1 toss but lost the other? ) + ?probability of losing 2 to 1 but winning the other? * ln( ?total wealth if you lost the 2 to 1 but won the other? ) + ?probability of losing both? * ln( ?total wealth if you lost both? ) )

If W is your net worth, X is what you wager on the 2 to 1 and Y is what you wager on the 3 to 1, that equation that you wish to maximize would be:

e^( 0.25 * ln( W + 2 * X + 3 * Y ) + 0.25 * ln( W + 2 * X ? Y ) + 0.25 * ln( W ? X + 3 * Y ) + 0.25 * ln( W ? X ? Y ) )

The optimal point would be when X is 21% of W and Y is 31% of W. Note that the percentages do not add up to 100%, that?s because you could lose both coin tosses.

Mathematically, going 100% one way or the other is definitively the wrong choice. The optimal choice is always somewheres in between.

As to how to estimate the probabilities, that?s more complicated particularly with gold and silver which are correlated to some degree but basically you would hypothesize relationships and use Causality Modeling to determine reasonable probabilities much in the same way that we link the cancer death statistics to smoking.

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