A Valuable Lesson for Gold Bulls
By Tom Dyson
October 10, 2007
Last week, a good friend of mine bought gold futures around $745 an ounce.
Using less than $1,000 in margin, you can buy $30,000 in gold. The thing is, buying gold on a margin like this makes you twitchy. You become very conscious of every little price movement. In this case, my friend found himself checking gold news every 10 minutes and obsessing over its price.
This isn't the mindset of someone who is comfortable in his or her position.
My friend also bought gold at a new high... a 27-year high. I was worried he was taking on too much leverage, especially after my mother told me last week that she was about to buy gold herself. I've been telling my mother to buy gold for five years. The fact that she wants to buy it now tells me the crowd is starting to get involved and sentiment is very optimistic…
The next day, gold dropped $20 in one session. My friend was terrified. He had no business in this position. Gold fell more the next day, stabilized the day after, and then on Thursday, it jumped $7. He took advantage of Thursday's strength to ditch the position for a small loss.
I feel for the guy… I've tried to trade gold this way before. When you trade futures, you cannot have doubts. With all that leverage, the market can kill you. This is why I prefer to keep the stress out of it and hold my gold in the form of gold coins.
There are many reasons to own pre-1933 gold coins. They are beautiful and rare. They are collectible art. And they are part of U.S. history. What's more, they are the cheapest they've ever been relative to bullion. For example, on eBay, I found a graded one-ounce 80-year old gold coin selling for less than a 12% premium to the spot gold price.
But the thing I like most about gold coins is this:
To sell my gold coins, I'd have to line up in the bank, open up my box, take my coins to the post office, wrap them up in secure packaging, buy insurance, and pay postage. These hurdles prevent me from selling. They make it easy for me to hold. Compared to the anxiety you get from futures, owning gold coins feels like a weekend stroll along the beach.
When I tell my family I hold my savings in gold coins, they think I'm taking a big risk. "You ought to have some cash in the bank," they tell me. My response is, gold coins are the safest investments in the world. There is no safer investment, period. Compared to gold coins, money in the bank is a speculation.
Prices are rising faster than they have in years, interest rates are awful, and now Bloomberg reports that some money market funds - the safest cash investments offered by your broker - hold billions in subprime debt. No thanks, I'll keep my gold.
I think it's inevitable that gold will trade for $2,000 an ounce in the future. Right now, it's at $730. I already have a large position in gold coins. If I want more exposure, I will buy more gold coins. They are cheap, stable, and very easy to hold. You should try the "low stress" way to own gold sometime...
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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