I got a great question in my email this morning, and I'd like to share it, and my answer, with you.
Using your methods, how can one know when gold and silver are grossly overvalued? Much like the tech stocks around 2000-2001?
I don't think of it in quite those terms… I use gold as the unit of measure, and thus see it as unchanging. The USD may rise and fall, silver may rise and fall, but gold is my constant, like cash.
If you put 1kg of gold in a safe for 10 years (or 100 years!), you will still have 1kg of gold. No gain, no loss. Put enough $100 bills to buy 1kg of gold in the same safe, and you will probably not be able to buy anything close to the same amount of stuff with it in 10 or 100 years (if the bits of paper have any value at all!)
So taking the US Dollar first, your question would be translated as "how can one know when the dollar is grossly overvalued, much like the tech stocks in 2000-2001?" If that time comes again, you will want to sell your dollars and go to cash (gold), just as in 2000-2001. Conversely, we could get a bottom in the USD, as in 1980, and it might become a good long-term speculation. I don't think that is anywhere close yet. And there is a real possibility that the USD will continue to fall gradually for a long time, or suddenly fall a lot, or even be replaced by some other monetary unit leading to a near-zero value… so I see buying dollars as a risky speculation, but one that could be quite profitable from time to time – as indeed it has been for the last 12 months or so.
My favorite tool is the "half-life of the dollar chart
". When I see the USD moving below the half-life curve significantly, say by 10%, I start paying attention. If it starts to recover, you could be entering a period of mean reversion that would make the USD a good buy. The main fundamental that is likely to drive the USD up would be positive and rising real rates of interest. When the bond vigilantes ride again, it might also be time to buy USD, at least for a medium term speculation. As long as the Fed is holding interest rates low, and concern about the economy and deflation is strong, I think you are better off in cash (gold), since the Fed will be using various tricks to increase the money supply to fight these perceived threats.
Silver is a different animal; I see silver as primarily an industrial metal, with a secondary monetary appeal to smaller savers. As such, it is quite volatile, but unlike the USD, will never be without value – and is thus a less risky speculation than the dollar. My suspicion is that either the economy will need to improve dramatically, or the USD will need to tank, for silver to show real strength.
I hope this is helpful!