Mistakes Made When Trading Gold

| March 9, 2009 | 0 Comments

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).

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.

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Category: Commodities

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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