Tuesday 25 June 2013
Monday 24 June 2013
5 Steps to Being a Happy Goldbug
1. Ignore the mainstream media
As gold fell this appeared on Reuters courtesy of Felix Salmon: "It's important that goldbugs are seen to not only have silly beliefs, but also to have lost a substantial amount of money. Gold is a fear trade rather than a greed trade - it's defensive, and defensive investors are always particularly loss-averse. If you lose money betting on high-flying tech stocks, that's much more likely to be money you can afford to lose than if you lose money after putting your life savings into precious metals."
The mainstream media mob have a three-pronged pitch fork especially for attacks on gold, which they regularly like to wield about.
The first prong is the intelligence insult prong, which was recently used by Paul Krugman who wrote back in April that he hopes 'the gold price crash will finally bring intellectual capitulation.' Implying that those of you who have invested in gold went into the process completely blind and misinformed.
The second prong is that gold is in a bubble and the bubble has now burst. much to their delight. Gold was clearly never in a bubble. A bubbles requires mass participation and enthusiasm for an asset, combined with the use of lots of leverage. Gold does not fit this bill - only representing 1% of global financial assets and seldom held with leverage.
The third prong claims gold is only a fear trade and that the recent fall in the gold price shows investors are now feeling more confident about the economy and feel more wary about gold. Iza Kaminska recently wrote in the FT that it is becoming 'ever harder to justify a role for gold' given that the commodity landscape has now been reset.
2. Don't listen to predictions
Speaking of the media, no-one loves a price prediction like they do. But the gold price is rarely what gold investment is all about.
Those who invest in gold, rarely do it because they see the price hitting $10,000 an ounce, but rather because they see central banks and governments making poor economic decisions which will drive the value of sovereign currencies down and therefore the gold price to new highs.
Full-time gold commentators, who have a fully vested interest in gold rarely review or amend their predictions. Few place timescales on what will happen to the gold price. Jim Sinclair who recently predicted prices of $3,500 gave no timescale of when this would happen, instead looking at debt levels and ensuing currency wars which will make way for the gold price to fly.
But of course we don't hear about legends', such as Mr Sinclair, predictions instead we hear about those from the likes of Goldman Sachs who right before the recent gold crash told clients to short gold.
Similar institutions continue to adjust, amend and scrap their gold price predictions according to short-medium term developments in the market such as stock market performances and employment numbers. They rarely regard the impact of long-term monetary easing on the confidence of those with cash in the bank. Hence why gold price predictions from high-finance are so often wrong.
3. Watch the fundamentals
What are the fundamentals? They're the same ones that the mainstream media ignore. So when financial journalists are decrying the end of gold because of strong performance in the stock market or the dollar's strength, a happy goldbug checks behind the curtain to make sure the banks are still printing money, negative interest rates haven't been amended, central banks continue to buy gold etc.
To help you keep an eye on the fundamentals, ask yourself the following questions:
Has confidence returned to the financial and monetary systems?
Are there more or less EU countries heading for financial difficulties?
Is the Fed still pumping money and do they have a solution on repaying their debt?
Are central banks still printing money and devaluing currencies?
Is easy monetary policy likely to continue?
Are real interest rates positive?
Are central banks still buying gold?
Are individuals across the world still buying gold?
Are there more or less EU countries heading for financial difficulties?
Is the Fed still pumping money and do they have a solution on repaying their debt?
Are central banks still printing money and devaluing currencies?
Is easy monetary policy likely to continue?
Are real interest rates positive?
Are central banks still buying gold?
Are individuals across the world still buying gold?
4. Don't speculate but instead preserve wealth
Gold bugs do not invest in gold if they're looking to play the market, make a quick profit and take a bit of a gamble. Those looking to own gold do so as it is money which will holds its value in the future.
The unique properties of physical gold mean that it will never be completely valueless. Those who have been speculating are those who have felt the pain of the gold price drop (and are the cause of it) but those who have hung onto their physical gold have felt neither pain nor jubilation. The amount of gold in their possession has not diminished, it is only those who speculate on paper gold who would question its price.
The drive in gold prices in the last decade will be supported by the physical gold buying and hoarding which has taken place. Speculating with gold suggests that investors buy gold in the hope of being able to sell it for much more paper currency than the amount that originally bought it. Those who preserve their wealth in gold do not hope to buy more paper, they have opted for a different (superior?) currency.
5. Ignore the price
This is something we talk about a lot on the Research Desk. When we discuss the gold price this is not the same as the value of gold. This, as we said above, remains the same.
However when we talk about the price of gold, we should instead be thinking about currencies priced in gold. You don't even need to work it out to know that when priced in gold, currencies have plummeted in price. This week the Bank of England advisor, Charlie Bean reported that the value of the British Pound, against other currencies has fallen by 25% in the last five years. Against gold the British pound has fallen by over 90%, other major currencies have had a similar experience.
So whilst the price of gold in US dollars, British Pounds and the Indian Rupee, to name a few, has fallen slightly in the last month this is nothing in comparison to the fall of the sovereign currencies' value against gold.
5 simple steps...
So rather than fretting about the gold price as bemoaned by the mainstream media, don't look at short-term predictions, they're short-sighted and rarely look at the fundamentals. The same fundamentals which affect the value of currencies, and not the value of gold.
Gold bullion is a unique savings vehicle and possibly the most divisive asset in finance. As such, there is a never ending media circus around the gold market which can be distracting and stop people buying gold for the wrong reasons.
We hope these 5 key points help you find clarity amidst the talking heads' sound bites, Western central bank propaganda and general misinformation.
Sunday 23 June 2013
Basic Investing 101: The Strategy Every Investor Should Know
I'd say the first thing to learn if you want to start investing is dollar cost averaging. This means investing the same amount for a certain period of time, such as a month, several months, or a year. As an example, pretend you invested $100 a month. By investing the same amount every month, you are not jumping in and out of investments at the worst time.
In effect you are preventing your investing plan from trying to time the market, thus saving yourself from the losses associated with trying to time the market. Dollar cost averaging forces you to buy more when a stock is low and buy less when it is high.
The truth is that the market is unpredictable and no one can truly determine when it's at a peak of or is about to shoot back up. This is the same with any stock. Because of this, we can deduce that the market is volatile and constantly moving upwards or downward. The only way to profit from such an environment is to be invested long term, ready to ride out the rough patches in order to reap benefits later.
A strategy constantly jumping in and out of the market will not be profitable, and can't be relied on consistently. By implementing Dollar Cost Averaging, you are always adding to your investing plan and letting your investments compound instead of pulling them out prematurely. However, you are resisting paying too much because you have set a consistent number for every month. So if the market is near the top, you are buying less shares. But as the market drops and nears the bottom, that same dollar amount is able to get you more shares for the money.
For example, let's say you are investing $100 a month. When a stock is at $10 a share you are buying 10 shares. Now if the stock is up to $50 after a month, you are only buying 2 shares because you are forcing yourself to invest the same amount. If the price is down to $5, you can buy 20 shares. See how we are buying low and selling high, instead of trying to buy all at once and regretting selling too early or buying too late.
Dollar cost averaging is a great place to start, for ANY investing plan. I hope you can see just some of the benefits of such a strategy, as I've laid out here. I wish you the best in your path to investment education.
Saturday 8 June 2013
Investing in Stock Options
Most investors would buy stocks that they think will give have a higher price in the future especially for those who are into long-term investment plans. However, there are some investors who look into making profit within shorter time duration. They can invest in stock options which will allow them to make use of the capital that in a better way. Option investing involves some key features namely leverage, protection and also volatility trading. Traders who understand these elements may be able to succeed in their stock option trading activities.
Through leverage, traders are able to control a bigger volume of equity as they only need to have a certain percentage of the entire capital that is needed. They are able to speculate on the prices of the stocks on a given period of time. Traders can make use of the long call option strategy if they project that the future price of the underlying security will increase above the strike price before the expiration date. There may be no limit when it comes to the price of the stocks at expiration date. Hence, traders can attain good profits if they choose to make use of this strategy.
Stock options may also provide protection to traders through the insurance that they can include in their trading plans. They can make use of protective put options to serve as a hedging strategy in case the market turns against them. Traders can use this strategy to protect their investments from uncertainties before the expiration date and while they are still trading in a bullish market. They may also be able to protect their potential profits on the shares that they have previously purchased as well. Traders who employ this strategy may also be able to realize unlimited profit just like the long call option strategy.
Traders can also take advantage of the market whichever way the trend is moving. They can make profit through volatility trading. Traders for example can buy a put and a call option simultaneously on a certain underlying stock that has the same strike price and the same expiration date. This strategy is known as the long straddle and it reduces the amount of risk that the traders are getting into. Traders can gain profit through the volatility of the underlying stocks or securities over the time frame specified. These are some of the strategies that traders can make use of if they would like to limit their risks while they increase their chances of gaining profit from their investments in stock options.
There are many ways to trade futures options. Commodity option trading can use different techniques that combine commodity options together to trade with little risk. Professional traders always think about limiting their risk. Whether you trade options or not, you should always set loss limits.
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