It's exciting to think we may be nearing a mania in gold. The price will likely double or more within a 12-month period not too far in the future (it rose 125.7% in 1979). And yet, amazingly, there will be investors who lose money in that run.
How? Chasing returns. Jumping in and out of positions. Too emotional. Underinvested. Lack of diversification. Inappropriate expectations. Ironically, all of these are within the control of the investor.
While you likely have some exposure to precious metals if you're reading this, is your portfolio arranged in the most effective ways to take full advantage of the ongoing bull market? In my opinion, there is a material difference between those who will make enough money to vacation in Malibu vs. those who could choose Milan.
And those differences mostly come down to mindset. With the assumption that gold has years to go before it peaks, here are a few New Year's resolutions to consider for your precious metals portfolio...
Resolution #1: I will buy gold until it doesn't matter how much money Ben Bernanke prints.
Even if the statements from your bank or stockbroker show an increase every month, inflation is eating away at your capital. To insure the real value your assets, include a meaningful amount of gold and silver. How much? When the next announcement of quantitative easing doesn't make you flinch, you're getting close.
Yes, the government says inflation is low, but the full effects of all the money the Fed has printed have not yet hit the system. They will. As the saying goes, it wasn't raining when Noah built the ark.
Resolution #2: I will purchase gold coins for personal storage.
Even if you buy precious metal ETFs, pool accounts, or other "paper" forms of gold, keep some coins under your direct physical control, because sometime in the next few years you may need them to buy Cheerios or gasoline or fix your roof or have your appendix removed. I suggest Eagles, Maple Leafs, Philharmonics, Krugerrands, and Buffalos because they are the most widely recognized and hence easier to trade than even small gold bars. You don't want a potential buyer questioning the authenticity of your gold if you need quick cash.
How much should you put into coins? There's no magic number, but don't stop until you have at least three months of living expenses stored away. And then continue adding as your assets increase. If you don't have any, start by buying at least one. Today.
Resolution #3: I will not get emotional about gold's volatility.
News flash: gold will have a correction in 2011, probably more than one, and maybe a big one. Consider these facts: Gold's average decline in the current bull market is 12.8%; there have been at least two corrections greater than 5% every year since 2001; and we've had two 27.7% sell-offs just since 2006. How you react to the next pullback could mean the difference between taking a loss and doubling your gain. Will you panic and sell, or hold tight and perhaps even buy more?
No one adds to his success by fretting about daily ups and downs. This leads to too much trading and the self-defeating costs of commissions and bid-ask spreads. Watch your investments, of course, but with some emotional distance.
I believe we're in the middle of a long-term trend for precious metals. So give it time to deliver the profits you're seeking. Your precious metal investments are like a cake in the oven; you'll ruin them if you keep opening the door.
Resolution #4: I will learn to buy on the dips and average down.
Are you happy when gold or silver fall in price? If not, why? Unless you're already fully invested, treat the decline as a gift that lets you buy more at a better price. The most profitable way to add to a position is to "buy on the dips" when you'll get more for your money. This means you'll be buying on days when the price is dropping. By averaging down, you lower your overall cost and increase your profit when you eventually sell. For me, the bigger the sell-off, the bigger the buying opportunity.
Resolution #5: I will not continually buy and sell, or try to time the market.
How are traders and male college freshmen alike? They chase tops and bottoms, and they don't always get what they want.
This is how most people lose money during a bull market - by attempting to time tops and bottoms. This rarely leads to success over the long run. Just buy on pullbacks and hold until the reasons for the bull market go away. This is exactly how Doug Casey made a fortune in this industry.
Resolution #6: I will save every month.
You want savings not just for an emergency - lost job, major repair, unexpected surgery - but also for bargain hunting. As the troubles in the world mount, the market will become littered with bargains of all kinds. Only habitual savers will have the wherewithal to take advantage of the opportunity.
Keep in mind that it isn't just about how high gold and silver prices go, but the economic and monetary climate that accompanies the rise. In my opinion, your portfolio must be able to withstand the following:
- worldwide rejection of the U.S. dollar
- high inflation or possibly hyperinflation
- another recession or, worse, a depression
- a vulnerable stock market
- ongoing real estate woes
- a large swath of municipal defaults
- lackluster profits for most businesses
- government attempts to "fix" the economy by printing more and more money
Is your portfolio ready for all that? Maybe so, but by following these New Year's resolutions, you can be assured that you not only avoid the inevitable consequences, but maybe earn life-changing profits as well.
Milan anyone?
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