Don’t buy gold for profit — that’s risky, and you’ll probably time it all wrong. Instead, buy gold for security. If you’re looking for profit, find a way to produce something that people are willing to buy, or buy stock in a company that does. Profit comes from productivity; security comes from being prepared for the worst.
This isn’t to say you shouldn’t buy gold. You should certainly have gold in your portfolio — at least 10-15%. But you should buy gold as investment insurance and a hedge against inflation and disaster — not for profit or income. I explain why below.
Motivation is Almost Everything.
Investing is psychological. No one adheres to a completely pure strategy — we’re all susceptible to emotional decisions at least on some level. And the emotion of “greed” can absolutely destroy us if we don’t unleash it in a secure, safe manner.
So, while I encourage investors to always buy gold to have in their portfolio, I have to add the disclaimer: you shouldn’t buy gold for profit, because the only potential profit from gold is speculation. Basing your investment decisions on non-income speculation is risky, and most people get burned. It’s just not necessary.
How to Build Profit Correctly.
The best kind of profit is income investing. Investing in income earning investments allows you to systematically build wealth, and is much more efficient for long-term investing. With speculation, you have to get it right every time or you lose your shirt. With income investing, you’ve just got to get it right once, hold on, and collect your checks.
I’ll be writing more about income investing in the future, but for now, suffice it to say that profit should be systematic for most investors — almost everything else is a pointless risk and usually ends poorly. Don’t get me wrong… I’m not saying you shouldn’t buy gold. Precious metals — mostly gold and a little silver — belong in every cautious investor’s portfolio. It serves as a great disaster and inflation hedge. And inflation is a big problem, considering the Federal Reserve is planning on creating more inflation on purpose, and the government is showing no signs of cutting spending.
Speculation for Profit vs Speculation for Security.
An investment portfolio based on speculation for profit rarely works. Sure, there are exceptions — but they’re just exceptions. Almost all speculators lose their shirts. All speculators take big risks that they don’t necessarily need to take.
Speculation for security is a little different. It’s understandable to take a risk in order to thwart a larger risk. For example, buying gold takes on the risk that the metal’s price will drop, leaving you without income you would have received with other investments, and even a loss considering the dropped price.
But that risk is pale in comparison to the fact that having 15% of your portfolio in gold can help your net worth soar during recessions and times of political turmoil.
It’s similar to investing in insurance. Of course, most people get less out of insurance than they pay in — and that’s a very common risk. But losing a little money in the long run is much less of a risk to most people than, say, getting a large hospital bill out of the blue. Insurance is usually a loss — but it’s a good choice for cautious people. People don’t buy insurance to make money, they buy insurance to make security — and gold is the investing equivalent of insurance.
Why You Should Invest in Gold.
First, there’s a lot of talk out there about how gold is at an all-time high. No, it’s not. Gold isn’t anywhere near its all-time high after you adjust the prices for inflation — gold still has a long way to go before it hits its high. If you think things are going to get worse than before, then that’s all the reason to add gold to your portfolio.
Second, a lot of political turmoil is just around the corner. The governments’ debt isn’t going to delete itself, and any drastic action the government might take to fight the debt is going to leave the people trusting the government much, much less. When people distrust governments and official currencies, they flock to gold. That’s just beginning to happen — and that’s another reason to be bullish on gold.
Third, having substantial gold holding ensures that your net worth will never hit $0, assuming you aren’t in debt or have your gold stolen. This security is another reason I encourage debt-free living — being debt free with secure gold investments ensures that you actually have a net worth, which is something billions of people can’t claim.
In the end, you should buy gold as a security hedge — buy gold as investment security. But don’t buy it with the goal of flipping it for profits. Don’t day-trade gold. It’s risky, there’s no reason for it, and there are better ways to build an income.