Mistakes Made When Trading Gold
The Dynamic Wealth Report
March 9, 2009
Do You Make This Mistake When Trading Gold?
Just a few weeks ago I wrote a great piece on gold. Maybe you remember
it? I told you it was time to buy. If you followed my advice, you’re a
bit richer today for it.
Just a few weeks after that article, gold rallied. The trade I suggested
surged 19.5% in value... Not bad!
Unfortunately, I know some investors actually lost money making the same
trade. They made a mistake many beginning gold traders make. They bought
the wrong thing. Instead of harvesting 20% gains, they’re sitting on
losses.
I’ll tell you about this big mistake later on. First a little more on
why I still like gold.
Back in January, gold was trading around $900 an oz. Five weeks later it
was trading over $1,000 an oz. Now gold’s retraced a bit and is trading
around $930 an oz… a perfect time to buy more (or establish a new
position).
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Why do I think now’s the time to buy gold? Let me refresh your memory.
Reason #1 - US Dollar Overload
We’re in a tough economic environment. To boost economic growth, the
Fed’s doing two things. Cutting interest rates to nearly zero. And,
flooding the market with dollars.
My big concern is all the easy money Bernanke and Co. is pumping into
the economy. The numbers are now in the trillions. To do this, they’ve
had to run their currency printing presses 24/7.
All of this easy money is in high demand… for now.
Once the tide changes, we’ll see the value of the US Dollar plummet.
That’ll stampede investors into the safety of gold.
But, that’s not the only reason.
Reason #2 - Skyrocketing Inflation
Printing all these new dollars seriously raises the risk of inflation
down the road. It’s like the bad hangover after a crazy New Year’s
party. You knew you shouldn’t have done that last round of tequila shots… but at the time it sounded like such a great idea.
That’s what’s going on right now with all the easy money. It sounds
great now, but later on it’s going to be nothing but trouble.
Inflation is a major shot to our purchasing power. And that means our
dollars will fall in value. Suddenly everything will cost more from
bread to milk to machines. This in my mind is the biggest threat to the
stability of the US economy.
The best way to fight inflation is by owning gold.
But we won’t be the only ones buying.
Reason #3 – Gold demand from China
China is the world’s fastest growing economy. As in the U.S., Chinese
investors also buy gold as a hedge against inflation.
Recently, the Shanghai Exchange introduced an easy way for Chinese
investors to buy gold. Demand was off the charts. With more than four
times the population of the US, we’re going to be competing in a big way
to buy gold.
And with simple supply and demand, prices have only one way to go!
Reason #4 – Falling supply
Most investors don’t know this, but the amount of gold available to
trade is actually falling. See, some of the gold ETFs actually purchase
and store gold. This removes the shiny metal from circulation,
decreasing supply.
Once again, another reason prices will move higher.
I could go on and on, but I think you get the point. If you follow my
thought process and agree… then you probably want to add some gold to
your portfolio. Unfortunately some first time gold traders are making a
big mistake.
A mistake that could cost them big money.
The big mistake is buying gold coins. Many investors still feel the best
way to invest in gold is through coins. There are coin stores all over
the country who will sell coins produced by various governments. These
coins include Krugerrands issued by South Africa, or Canadian Maple
Leafs issued by… well… Canada.
Now, I know many long term gold bugs are cringing right now.
Give me a minute and let me explain why buying gold coins is a mistake…
Here are three quick reasons.
First, buying and selling coins can be difficult. Pricing is difficult
and there’s no national pricing mechanism. Also the Bid/Ask spread can
be huge.
Don’t believe me? The next time you’re in a coin store ask what it costs
to buy a Krugerrand… then ask what they’ll pay for that same coin. After
you pick yourself up off the floor you can send me a letter of thanks.
Second, when you buy coins, you’re not just buying gold. These coins
sell for more than the metal they’re made with. The condition of the
coin can be a big factor in price. One scratch on the surface of your
coin and the value could plummet. Think about it, gold prices could
skyrocket and you could still lose money buying coins.
Finally, you need to store that gold somewhere.
If you want to put a meaningful portion of your portfolio in gold you’d
have a small problem. Where do you put thousands, or hundreds of
thousands of dollars in gold? It’s not exactly something you bury in the
backyard. Think of all the additional insurance, or the added cost of a
safe.
Now, I’m not saying owning a few coins is a bad idea. I have a few coins
in my vault at home. But smart traders are now investing in gold with
ETFs.
These ETFs are based on the price of gold and can be quickly bought and
sold. Prices are well established (as are bid/ask spreads) and volume is
robust. You can also easily buy and sell them from your own trading
account right now.
In my opinion, the best way to invest in gold is through ETFs. Trust me
it will save you big headaches (and possibly some money) down the road.
• Coal Industry (Up 5.7%)
In the last three months, the coal industry has moved higher by more than
5%. Not bad considering how far down the market’s fallen over the same
period. A big portion of demand for coal continues to come from
utilities using the fossil fuel to generate electricity.
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