Buying Gold as an Investment

Gold is currently nearing the beginning of its third phase of a multi-year secular bull market.

Secular markets typcally tend to last 5-20 years and can often culminate in a blow off top phase. A secular bull offers security to buy and hold investors as it is determined by higher highs and higher lows. You can read more about secular trends on Wikipedia or there is a very good in depth read here. Gold's secular bear market ended June 1999 and hence the new gold bull began.

*There have also been calls for $2000 and $4000 gold over the next 5-10 years from some pretty influential commentators.

Here's a ten year chart to date.

1. Do not buy gold on margin. I'll repeat that, do not buy gold on margin. (In layman terms this means do not borrow against your house or max out your credit card to buy gold.) If you find yourself on the wrong side of a declining gold price it will end in more than tears.

2. If you want to trade the gold price only trade a third of your investment, even the experts never get it right all the time, by staying two thirds invested you will avoid any costly mistakes on your part. This bull should have at least five years to run, so you have plenty of time.

3. Don't put all your eggs in one basket. Many advisors would only advocate a 20% allocation of your portfolio.

4. Buy small and keep buying incrementally if you want to smooth out the ups and downs of the market.

Paper Gold: Essentially paper representations of the gold price. These include futures contracts, exchange-traded funds, pool accounts and certificates. They provide exposure to the gold price, however there are counter-party risks involved. Basically you only own the promise to give you the metal if you ask for delivery.

Physical Gold: Physical gold is sold in the form of bars, bullion coins and rare coins (see below). Modern bullion coins retail for between 2% and 4.5% above the spot gold price whereas gold bars usually have a premium 1 or 2% less. Physical gold is only suitable for a long term buy and hold strategy and there are insurance and storage costs to consider.

Numinastics: Rare coins before 1933 are of a very different investment psychology, there is a blend of a collector sentiment (similar to the art market) and investor speculation. Strong collector demand makes rare coins a better hedge against inflation however you have to consult coin dealers to ascertain value and it can have the charcteristics of a runaway train at its extremes.

Gold Mining Stocks: More risky than owning bullion itself but they do provide leverage against the price of gold. Gold mining stocks are clearly a stock component of your portfolio and are affected not only by the gold price but also by the price of the stock market. The HUI and XAU are the main indices for the gold miners. Divergence is the signal that everbody is looking and waiting for, namely rising gold stocks in a declining stock market.