A USAGOLD Gilded Opinion Library Selection
Ten Rules For Investing In Gold
by John Hathaway
Editor’s Note: Few have done a better job over the years of articulating the often misunderstood, yet compelling case for owning gold like Tocqueville Funds’ John Hathaway. Below in short form he offers ten nuggets of practical wisdom for those contemplating gold ownership.
“Gold is a controversial, anti-establishment investment. Therefore, do not rely on conventional financial media and brokerage house commentary. In this area, such commentary is even more misleading and ill informed than usual.” – John Hathaway
1. An investment in gold should be based on macroeconomic considerations. If one expects or fears rising inflation, destabilizing deflation, a bear market in stocks or bonds, or financial turmoil, gold should do well and exposure is warranted.
2. Understanding the internal dynamics of the gold market can be helpful as to investment timing issues. For example, the weekly position reports of commodity trading funds or sentiment indicators offer useful clues as to entry or exit points for active trading strategies. Reports on physical demand for jewelry, industrial, and other uses compiled by various sources also provide some perspective. However, none of these considerations, non monetary in nature, yield any insight as to the broad market trend. The same can be said for reports of central bank selling and lending activity. Central banks are bureaucratic institutions and in their judgements they are essentially market trend followers.
3. Excessive reliance on trading strategies to generate returns can be dangerous and counterproductive. Returns from a “buy and hold” strategy should be more than sufficient to compensate for the inherent volatility. Many who have tried to outsmart this market by hyperactive trading have under performed. Success is dependent in large part on the occurrence of “fat tail” events that lie outside the parameters of trading models.
4. A reasonable allocation in a conservative, diversified portfolio is 0 to 3% during a gold bear market and 5% to10% during a bull market.
5. Equities of gold mining companies offer greater leverage than direct ownership of the metal itself. Gold equities tend to appear expensive in comparison to those of conventional companies because they contain an imbedded option component for a possible rise in the gold price. The share price sensitivity to a hypothetical rise in metal price is related to the cash flow from current production as well as the valuation impact on proven and probable reserves.
6. The carnage of the last twenty years has simplified the task of individual stock selection because so few have survived the gold bear market. Although a rising tide may lift most boats, financial statements should be reviewed with special attention to hedging arrangements that could undermine participation in higher gold prices or even jeopardize financial stability. Individual stock selection is less important than identification of the primary trend.
7. Even though gold itself is a conservative investment, “gold fever” attracts a crowd of speculators, promoters, and charlatans who only want to separate investors from their money. Avoid offbeat “exploration” companies with little or no current production and gargantuan appetites for new money.
8. Bullion or coins are a more conservative way to invest in gold than through the equities. In addition, there is greater liquidity for large pools of capital. Investing in the physical metal requires scrutinizing the custodial arrangements and the creditworthiness of the financial institution. Do not mistake the promise of a financial institution to settle based on the gold price, for example, a “gold certificate” or a “structured note”, (i.e. derivative), for the actual physical possession of the metal. Insist on possession in a segregated vault, subject to unscheduled audits, and inaccessible to the trading arrangements or financial interest of the financial institution.
9. Gold is a controversial, anti establishment investment. Therefore, do not rely on conventional financial media and brokerage house commentary. In this area, such commentary is even more misleading and ill informed than usual.
10. Don’t settle for too little. Should outlier events now deemed unimaginable by consensus thinking actually occur, the price target for gold would be several multiples of its current depressed price. Gold represents insurance against some sort of financial catastrophe. The magnitude of the upside is a function of the amount of paper assets that would be converted to gold irrespective of price.
A note on adding precious metals to your portfolio – Some investors have very specific ideas about the financial and economic contingencies they wish to hedge through precious metals ownership. Others are not so certain and design their portfolios to cover a range of possibilities. Some come to us as first-time investors. Others come as experienced investors who know what they would like to buy. Some wish to diversify across the spectrum of available gold and silver products. Others wish to concentrate their capital in areas of the market offering the most striking opportunities. Whatever your situation or analysis, USAGOLD will help you construct a portfolio to meet your specific needs and position your portfolio for the uncertainties ahead.
We carry a full range of physical gold and silver investments all offered at competitive prices. We invite you to contact us by telephone to place your orders (still the way most investors enter the market – 1-800-869-5115 x100 ) or you can go directly to our Online Order Desk and place orders at your discretion. Whatever your approach, we think you will come to appreciate the USAGOLD pricing and service advantage and quickly discover why thousands of investors have chosen us as their precious metals firm. (We invite your visit to the Better Business Bureau website to confirm our five-star, zero-complaint record. The report includes a large number of verified customer reviews.)
Disclaimer – Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset-preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes and, as such, USAGOLD does not warrant or guarantee the accuracy, timeliness or completeness of the information found here. (Please see our Risk Disclosure here.)
by John Hathaway, CFA
July 2, 2001
Copyright © 2001 by Tocqueville Securities, L.P. All Rights Reserved.
This article reprinted at USAGOLD with permission.