All that glitters is not gold

 By Dale Gillham | Published August 2015 in the Daily Telegraph

For many investors, swapping cash to buy gold bars certainly has its allure, particularly when other investments may seem a lot more risky, but before you get too excited about the thought of holding gold, let me say that not all that glitters is your golden opportunity. As with any investment, there are times to buy and times to sell.

In my experience, it is extremely common for investors to make mistakes when investing, simply because they fail to sell. Buying something before you understand when and how to exit can be financial suicide. But how do you sell, when you have never learnt how?

This issue is so common, which is why, when teaching ‘the how’, I harp on about the importance of setting stop losses. Investors who fail to set a stop loss to preserve capital, in case price moves in the wrong direction, invariably continue to hold, and as a result, end up with a capital loss.

Let me say, when you are sitting on a capital loss, and you don’t have the knowledge to know what to do, it doesn’t matter how shiny your gold bars are, the reality is, they are worth less than you paid.

I generally recommend that investors set a stop loss at around 15 per cent of the buy price. This means that if the price of gold were to fall one cent below this level you would sell.

When someone tells me they want to buy gold the first thing I ask is why?

Some investors choose to own gold simply because it is something tangible that they can see and feel, and they can buy a little or a lot, depending on their investment strategy. Further, gold has always been viewed as a defensive asset because it tends to rise when other investments fall.

However, you don’t get from gold the benefits that other investments create, in that the best investments provide both income and capital growth. So if you are not getting both, then someone else is, which is one of the reasons why the best investment vehicles are property and shares.

The reason why buying gold doesn’t work for many investors is because they don’t understand it, or how the gold price moves. As a consequence they end up buying too late, and thinking it is a defensive asset they want to hold, which in my book makes it high risk. There are times to be in and times to be out of gold.

When the money starts flowing out of gold, you will usually see a very dramatic fall over just a few months.

Let’s consider what happened to the gold price over the past few years and where it is likely to go.

In 2009, the price of gold rose from around USD $1,000 an ounce to nearly double by September 2011.

However, the gold price then fell by more than 20 per cent to around USD $1,523 per ounce in November 2011, as money was being moved by those with the knowledge, from gold to growth assets like shares. Investors without the knowledge thought it was their opportunity to buy gold cheap, and this is how the money began flowing to those in-the-know.

Gold moved sideways in 2012 through to around March 2013, before falling more than 20 per cent into mid-2013. Shares rose during that time. The gold price has continued to fall and is yet to trade to my target, of below USD $1,000.

This is where a little knowledge can be worth its weight in gold.

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