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Five mistakes to avoid with gold investment

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Published : February 28th, 2013
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Category : Gold and Silver

This last week has seen gold drop below $1,600 and bounce back up again. Discussions of currency wars, negative interest rates and increasing uncertainties in Europe mean many are looking for a safe-haven and are turning to gold investment, particularly whilst the price is so low. In order to help those considering gold investment, myself and Will Bancroft have come up with the top mistakes to avoid with gold.

Whilst we believe gold bullion investment can play a vital role in modern portfolios, take a moment to consider what we think are some key pointers for investors ready to buy gold.

Don’t get over exposed

It is easy to over-allocate money to asset classes, and some gold investors can get a little carried away with how much exposure they have to gold. Asset allocation can indeed be subjective and highly personal according to our needs, but the reason we caution not to get too exposed to gold is because of the nature of how you might find gold itself.

Gold is indeed the antithesis of much of the modern financial system, and the way investors find gold might often be described as a gradual learning process with a few road to Damascus moments where we suddenly experience ‘revelations’.

After experiencing this learning process it is tempting to believe that the emperor has no clothes, and move to totally opt out of the contemporary financial system. However, take a moment to reflect here; until any potentially different future gold-centric financial system emerges, you need to be able to play on both sides of the fence.

Don’t over-leverage on gold

When you’ve discovered your new world view and are keen to load up on gold, it can be tempting to use leverage to increase your exposure, perhaps to use the free cash to do something elsewhere.

Whilst we are not saying leverage is never a good thing, individual investors appear less well served by it than professionals who sit in front of a screen all day and whose main occupation is trading. Gold can indeed be quite volatile, and it is very tempting to leverage up your exposure to then be ‘stopped-out’ when a price correction occurs.

If you don’t want to suddenly be scrambling to meet margin calls, and want to be able to hold your gold position through the ups and downs that are part and parcel of gold investing, go easy on the leverage.

This last 18 months performance is a classic example to heed. Gold majestically soared to >$1,900/ounce in September 2011 to then give back much of these gains in chops down and attempts to climb back. If you owned physical bullion without leverage this period was far easier to sit out than if you were leveraged and more exposed to any gold price drops.

Don’t buy unallocated gold

The word allocated is still not a familiar one, even to those heavily interested in the gold market. When you buy gold that is ‘allocated’ what it really means is that you are taking legal title of your gold investment at the point of sale. You buy gold that is your legal property.

In contrast to this many investors buy gold in ‘unallocated’ form. Most investors don’t realise the key difference between the two forms of ownership, and are mostly likely to be offered the unallocated version by their bank, broker or vendor.

Unallocated gold is a bit like a promise to gold, where your gold investment is dependent on your financial counterparty performing their obligation. If you are buying gold to isolate yourself from the financial system this might not be what you want. Why take the risk of your gold holding disappearing with the collapse of your broker/bank? MF Global was a recent reminder for investors here.

Given that you can buy gold in allocated form as easily as using an unallocated account with an investment bank or broker, it is not difficult for investors to gain legal title to their gold and enjoy greater security and control.

All bullion on The Real Asset Company’s platform is allocated to you at the point of sale.

Don’t just track the gold price in US Dollars

Often when you read market updates on the gold price, you will read the yellow metal is ‘up 2%’ or ‘fallen below its monthly high’, rarely do commentators specify which currency they’re pricing gold in, but 99% of the time it’s the US dollar.

This does make sense, after all the US dollar is the international reserve currency, and effectively replaced gold as such in the late 20th century.

However, gold’s price in dollars only matters if that is the currency you earn and save in. This year so far, gold is down by 3.6% against the US dollar, but when priced in British pounds gold is up by 3.6% and in the Japanese yen it is up by 2.0%.

Gold is a currency on its own, it is used as an alternative to other currencies and investors choose to compare its price alongside other national currencies. Therefore, it makes sense to compare it to alongside the money you earn in or choose to save in.

A few months ago we decided we would stop looking at the traditional gold price graph, and instead turn it literally upside down. When you do this you see the value of currencies priced in gold, as opposed to gold priced in currencies, and we found that currencies – whether dollars, euro, yen, pounds, renminbi or rupee have all lost a huge amount of value against gold in the last ten years.

If you look at gold priced in just one currency, over a short-term period then you will see very little. Looking at it across several currencies over the long-term then you will see the same trend; the declining value of paper currencies everywhere.

Don’t buy gold with short term aspirations

Once you’ve been inspired (or spooked!?) to buy gold, investors need to be ready for any price corrections that can occur, and have a healthy medium to long term outlook.

Don’t rush to buy gold in the hope of a 50% appreciation in the gold price in year one. Investing rarely works like this, and you need to focus first on long term preservation of capital when you buy gold online.

If you bought gold in August 2011 you might still be sitting on unrealised losses, but with a three to five years mind-set at the start you can let time work its magic for you as national currencies continue to be trashed by central bankers and the fundamentals behind the gold price reassert themselves.

If, like many, you buy gold bullion as protection form the structural problems within the financial system, don’t expect these problems to manifest themselves immediately with a ‘crack up boom’ in currencies like the dollar, euro and yen.

China, Russia and other emerged nations that have a role to play in over throwing the dollar based system of today, do indeed have a healthy respect for gold and monetary history. China increased their gold imports by 12.6% last year, whilst Russia’s central bank has imported more gold in the last decade than an other country.

However, these actors will not dictate the course of future financial history by themselves and black swans are more prone to appear than the human mind predicts.

Ultimately gold’s fundamentals will assert themselves. They are like unwritten laws of economic gravity, but very few can predict how quickly, how viciously and to whose benefit exactly.

Buy gold with a medium to longer term view, and you’ll be able to steadily ride the fascinating journey along the way. We find it helps us sleep a little better too.

Got any gold tips of your own? Share them in the comments section below…

Please Note: Information published here is provided to aid your thinking and investment decisions, not lead them. You should independently decide the best place for your money, and any investment decision you make is done so at your own risk. Data included here within may already be out of date.

Data and Statistics for these countries : China | Russia | All
Gold and Silver Prices for these countries : China | Russia | All
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Jan Skoyles is Head of Research at The Real Asset Company, a platform for secure and efficient gold investment. Jan first became interested in precious metals and sound money when she met Ned Naylor-Leyland whilst working alongside him in the summer of 2010. Jan then went on to write her undergraduate dissertation on the use of precious metals in the monetary system. After graduating from Aston University Jan joined The Real Asset Co research desk. Her work and views are now featured on a range of sites including Kitco, GATA and The Telegraph. She has appeared on news channels including Russia Today to discuss the gold price and gold investing. You can keep up with Jan's commentary by subscribing to our RSS feed Gold Investment News.
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Jan your article is reassuring to say the least in the backdrop of falling gold prices. Gold is a long term investment with horizons of five years and above. Gold crossed $ 1000 about five years ago and at that time most believed this would not happen. Sitting above $ 1550 today for those of us who invested sub $ 1000 is a happy state with the intent to invest in more gold as opportunities unfold. Another important issue you have raised is that all currencies have depreciated more than gold over time so where is the hassle? As individuals storage is not an issue due to limited quantities but of importance is its form. Remain physical before failing financial systems or changes in regulations related to gold sweep the carpet from under our feet.
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Jan your article is reassuring to say the least in the backdrop of falling gold prices. Gold is a long term investment with horizons of five years and above. Gold crossed $ 1000 about five years ago and at that time most believed this would not happen. S  Read more
Papli - 2/28/2013 at 11:47 PM GMT
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