I first became a gold investor because I learned the history of it.
I learned about the thousands of years gold has been money.
I came to understand that gold has been rising ever since Nixon took those famous steps, or rather that the dollar has been falling against gold.
However, I wasn’t a very good investor when I made my first gold purchase. In fact, I bought right at the peak in 2011. I knew the long term gold story and I finally had some spare cash to invest, so I bought.
It turned out to be a bad financial move. I knew it had run up but I thought it was going much higher. A lot of wise heads were saying that the government stimulus in the wake of the GFC would push gold way up.
In the short term they were wrong. It corrected and I got caught out. But I still believe in the thesis that gold will go much higher because of monetary debasement.
In hindsight I just got my timing badly wrong on my first entry point. But it was a great learning opportunity.
Although I must admit I don’t feel so stupid when I hear comments like this from Lawrence Lepard, one of my favourite investors:
“[We] should be proud of the monetary stand we have taken. We are the Remnant. We are the righteous ones. We bought gold in 2011 at $1,900 and it went to $1,050 and we did not know why. But we hung on. We did the right thing and we will win.”
Over the last 10 years I feel like I’ve become much better as a gold investor. I’ve learned by doing and also by reading.
Hopefully over the next decade things will look better for gold.
In the meantime, here are the best pieces of advice I have learned as a long term buy and hold gold investor.
Identify That The Long Term Trend Is Up
Since Nixon severed the last ties between gold and the US Dollar (and thus all the world’s currencies) gold has been in a multi decade upwards trend.
Previously the USD price of gold had been fixed (more accurately the US Dollar was defined as a fixed weight of gold) but Nixon’s policy change meant the market was free to set the price.
That is why you just see a flat line on the chart before 1971 and why all market analysis of gold starts in the 1970s.
There have been several bull and bear markets along the way but the clear long term trend for gold is up.
This should more accurately be seen as a decline in the value of the US Dollar rather than a rise in the nominal price of gold. But nevertheless the primary trend is up.
When analysing shorter term trends, it is important to be aware of this long term primary trend.
But It Is More Important To Identify The Medium Term Trend
The problem with the primary trend is that it is a 50 year trend. This is longer than most investors time frames.
Ideally you don’t want to do what I did in 2011 and just buy gold because of the hard money story and the long term trend without any consideration of the medium term trend.
Otherwise you might be holding for a decade before you are in profit.
When I say medium term, I’m talking about years and even decades. You need to know whether you are entering the market when it is in an upward or downward medium term trend within the broader upward trend.
For example if you look at a chart of the 1990s you can see there was a clear downward trend. While if you look at a chart of the 2000s there is a clear upward trend.
Gold has had several bull and bear markets since 1971. Your aim is to identify which phase we are in and try to time your market entry accordingly.
If the market is in a bearish downward trend, then be patient and wait. If the market is in a bullish upward trend then you can buy the dips on the way up.
In practice, this might mean that if you discover gold in the wrong part of the cycle then you will need to be patient.
In fact there is actually a very good chance of this happening as media hype tends to be at its highest near a market top. A lot of new buyers come in during this mania phase, pushing the price to greater heights. This rewards the patient long term accumulators who have bought at much lower prices and the new buyers suffer the losses when the market turns.
I’m not suggesting you try to time the market in the short term. But as an example, analysis of the medium term trend would have suggested loading up on gold from the early 2000s to 2009, avoiding buying too much from 2010 to 2013 and then buying again from 2014-2019.
While this is easy to say in hindsight and it’s never so easy to pick at the time, if you are buying for a long term hold this is what you are seeking to do.
I encourage you to take a long term investment view, try to work out where we are in the cycle and buy the dips, thinking about where the price might be in 10 years time, if not longer.
Ignore The Short Term Price Movements
Short term price movements should largely be ignored by long term investors.
They can be valuable when trying to optimise your entry and exit points but otherwise forget about them.
The same goes for commentary on the short term price – you can safely ignore it.
Quite often the short term price movement can have a negative impact as it threatens your conviction and may tempt you into selling far too early, thus missing out on long term price appreciation.
Buy low, trust your conviction and ignore the volatility and the noise.
I like to follow Sovereign Man’s advice and only buy as much gold as I can sleep at night without checking the price.
If you check the price too often perhaps lighten up your holdings. If you can sleep at night without checking, then keep it that way and you can safely ignore short term price movements.
Over time your emotional threshold for volatility will improve and you can buy more and still sleep soundly.
Ignore the Haters
There are two types of people who don’t like gold as an investment. The first are best exemplified by Warren Buffett and argue that gold is a terrible investment because it is unproductive and has no yield. In other words is not a business with a dividend, like a stock is.
This criticism is accurate but misses the point. Gold should not really be considered an investment in the same way stocks are. Gold is money and the fact that it has no yield is one of its biggest selling points. It has no yield because it has no risk.
Buffett likes to say that stocks outperforms gold and he is right most of the time. But that’s how it should be. It’s like saying that grass is green. Productive businesses should return more than mere money that just sits there inertly.
You don’t hold gold to make a lot of money. You hold it for financial insurance. And you should be also be invested in stocks for their superior returns.
But it should be noted that in certain time frames gold will perform better than stocks. When stocks are in a bear market and gold is in a bull market it would be wise to have a higher allocation to gold.
The second type of criticism you will hear about gold is from Bitcoin maximalists. These people agree about the need for hard money and the problems with the fiat system. However, they believe that it is inevitable that Bitcoin will become the world’s monetary standard and gold will die off.
Some of the more arrogant Bitcoin maximalists sneer at gold owners as antiquated and idiots for missing out on Bitcoin’s superior returns during the 2010s.
I like Bitcoin maximalists because I have a lot in common with them and I acknowledge that their arguments probably will turn out to be right. In fact I hope they do, since it is my view that Bitcoin is much superior to gold.
The problem is we are still way too early to know if that will happen. Given the uncertainty, to me it seems unwise to ditch gold completely. To me the prudent course of action is to hold both gold and bitcoin.
As Lawrence Lepard says:
“The Gold v. Bitcoin debate is silly. We are all on the same team. Team anti-fiat. Gold holders should be rooting for Bitcoin and Bitcoin holders for gold.”
Even if Bitcoin emerges supreme and gold is demonetised the nominal price may not necessarily fall too far. What is more likely is that gold will still continue to appreciate against fiat, it’s just that Bitcoin would appreciate much more. That way Bitcoin would appreciate massively against gold.
While this would certainly be bad for gold, if we use the silver example then it clearly isn’t catastrophic. Silver was demonetised when the world adopted the gold standard and it massively fell in value against gold. But it is still a monetary metal.
My prediction is that if Bitcoin succeeds, gold will retain its monetary role (as there will always be a place for physical money) albeit it will play second fiddle.
But since I own both, I’m happy to be wrong.
Learn What Drives The Gold Price
As a gold investor you need to know what drives the price movement. You should immerse yourself in the market and get as educated as you possibly can.
This is true for whatever asset you are invested in but I think it is especially important with hard money like gold and Bitcoin.
It’s not like learning what moves the price of your favourite stock. Gold and Bitcoin are in a epoch defining battle over the very nature of money so the stakes are bigger.
However, don’t let this paralyse you and hold you back from first entering the market as long as you do so with a small position size.
Don’t sit back for years and not invest because you don’t think you are smart enough or don’t think you know enough. I feel the best education in the markets comes from having skin in the game and learning what drives the market as you watch your investments rise and fall.
Once you have developed your understanding you can then start putting more and more money in.
There are a number of things that have an influence on the price of gold:
- Investment demand
- Physical demand
- Central bank demand
- The relationship to the US Dollar
- Geopolitical shocks
- Confidence in the Federal Reserve
For non-monetary metals, industrial supply and demand is basically all that sets the price. With gold being a monetary metal, the supply and demand relationship is a lot more complicated. One of the complicating factors is that there are several different categories of demand as you can see in the list above.
Gold also often acts in an inverse relationship to the US Dollar. When the dollar goes up gold goes down and vice versa. This is largely determined by interest rates.
There is also a relationship between the price of gold and inflation. Gold can rise in periods of high inflation. This is not always a perfect correlation, but as you can see if you look at a chart of the CPI overlaying gold, there is a strong relationship.
Gold is also a safe haven asset. So in times of geopolitical uncertainty there is often a “flight to safety.” Normally the US Dollar, the Euro and gold get bid up by those looking for a safe haven.
Personally, I pay attention to the last factor the most – confidence in the Federal Reserve. As a gold investor you should always pay attention to the Fed. Not to keep track of how their decisions and announcements affect the short term price, which they do, but to gauge the long term trend of monetary policy over years and decades.
In fact more important than listening to exactly what the Fed says is to try and gauge how much confidence the market and the public has in it. It matters less what the Fed actually says and does and more whether people believe the Fed is in control.
Do they believe the Fed will preserve the purchasing power of the dollar? Do they believe the Fed can control inflation? Do they believe that the Fed can raise interest rates without popping asset bubbles?
The Fed will always project an aura of control but the reality is that they do not always have it. Fiat money is a confidence game and their number one job is to maintain the faith and respect of the market.
Their actual policy settings matter less than whether they are able to influence the markets the way they want and whether people have confidence in their actions.
That’s why gold corrected after the GFC. Gold ran higher when the market was uncertain as to whether the Fed could bring things back under control. When it appeared that they had control then gold corrected.
Yes, the Fed printed lots of money and slashed interest rates but they restored confidence to the markets, even if to sound money people that confidence was misplaced and not deserved.
If the market loses confidence in the Fed that means they will lose confidence in the soundness of the US Dollar. This will be bullish for gold. As long as they maintain that aura of control this keeps a lid on the gold price.
What continues to surprise many hard money economists and commentators is just how much confidence the market has retained in the Fed. Those who understand sound money see the QE and the low interest rates of the last decade and wonder how anyone can trust the central planners. Yet people do.
But it is inevitable that the Fed will lose control at some point. We just don’t know when that will be. And when the mask slips things will turn massively in the gold market.
Learn How to Read Basic Technical Patterns in Long Term Charts
I am not a technical trader. I invest based on value and fundamental analysis.
But I like technical analysis for two reasons.
The first is that it can be used to optimise entry and exit positions.
The second is that it can be used to analyse trends in long term charts and support long term fundamental decision making.
Most technical traders look for market patterns to execute short term trades. But there is no reason why you cannot use the same analysis to execute long term investments.
Technical analysis can be especially helpful in trying to ascertain whether a change in market direction is a long term shift or just a short term pause.
In a cup and handle, the chart carves a large U shaped depression before returning to the previous high. This is the cup. It then pauses and turns down briefly, forming the handle as investors take profits, before exploding in price. When you see a cup and handle, it is a bullish chart pattern.
Flags can be either bull flags or bear flags. This occurs when there is a sharp price movement in one direction with a short trend in the opposite direction. The move in the opposite direction is a pause not a reversal in the trend. Eventually the flag will be broken and the initial trend will continue. The price will often extend on the other side of the flag the same distance as the initial move.
Position Size Appropriately
If you view gold as money and the fiat price as fluctuating around gold then gold is very stable and the fiat currency is the volatile one.
Nevertheless we live in a fiat world with everything priced in fiat dollars. From a fiat perspective gold is a volatile asset.
Therefore it is important to keep your position size appropriate so you are comfortable. This will depend on your age and your risk tolerance and if you are willing to over or under allocate depending on whether gold is under or over valued.
Most gold commentators recommend about a 5-10% allocation to gold.
This allows you to have the benefits of gold as financial insurance without missing out on larger gains elsewhere. It also means that with a modest allocation you should not need to pay too much attention to or worry about short term price fluctuations.
Master Your Emotions
Because the gold price fluctuates in the short term against the US Dollar, you need to develop a high tolerance for volatility and be comfortable with the discomfort this can bring.
One way to help with this is to try to see gold as the stable currency against which the unstable USD rises and falls. This is in fact the correct perspective but it is hard to maintain this mentality in a fiat world where we view everything as priced in fiat dollars.
So while you should try and develop that mindset, it is also good to cultivate a mindset that is comfortable with volatility. You will need this for all investments, whether it is stocks, cryptocurrency or precious metals.
I think the best way to develop this comfort is through experience. Buy a small amount of a volatile asset and watch it rise and fall. Keep your position size small at first, so you don’t get wiped out, and allow yourself to experience the emotions of seeing the value of your position rise and fall.
The aim is to not get too giddy when the prices rises and not get too despondent when the price falls. If you aren’t exiting your position any time soon then the short term price fluctuation does not matter at all. You will learn to get comfortable with the price fluctuating within a wide range.
As you build your tolerance for volatility you can increase the amount of money you put into volatile assets.
When I first started investing a 20% drop in an individual asset would make my stomach drop. Now I can watch my whole portfolio swing wildly in 20% moves over short periods of time but I can hold my nerve. It still makes me uncomfortable, but I don’t make rash decisions in response.
If, like me, you invest heavily in precious metals, cryptocurrency and mining stocks then you need to have a high tolerance for volatility. But the good thing is that you gain it through experience.
You also need to try to separate your views on society’s issues and the role of gold vs fiat from your personal investment decisions. You can want gold to succeed as much as you like but if you buy the market top that is never a good move. This is much easier said than done but you should try.
Invest in Miners for Leverage
You won’t get rich investing in gold. Gold is primarily about wealth preservation not about making money.
If you time it right, you might be able to put a lot of money in gold at the bottom of a bear market and take it out in a market top. But generally the price moves are not significant enough to make serious gains.
That’s where miners come in.
Mining stocks give you an opportunity to invest in gold with leverage but with less risk than normal leverage plays.
Normally if you invest with leverage by investing on margin i.e. with borrowed money, the worst case scenario if you are wrong is that you end up owing money to your broker.
When investing in mining stocks the worst case scenario is that you get it wrong and your investment goes to zero. But you won’t have to pay a margin call.
The reason mining stocks offer leverage is because their profitability is dependent on the price of gold minus the cost to mine an ounce of gold. A small move in the price of gold can make a miner considerably more or less profitable and can thus lead to big swings in the stock price.
Let me give you an example with nice round numbers.
Let’s say that the price of gold was $1500 and a company’s cost to mine each ounce was $1000. At that price they are making $500 profit per ounce.
If the gold price goes up 33% to $2000, and the mining company’s cost stays at $1000, they are now marking $1000 per ounce.
Their profitability has doubled based on a 33% move in the price of the underlying metal.
This would be reflected in a sharp jump in the price of the stock many times greater than 33%. That is why miners offer leverage to the price of gold.
However the reverse is also true. If the price of gold collapsed 33% from $1500 to $1000 suddenly our miner is no longer profitable and is merely breaking even. This would result in a share price fall much greater than 33%.
If you are just starting out as a gold investor it is always advised that you start with the physical metal. It is always wise to build a physical position since it is hard money while a stock is merely a paper asset.
However once you have built your physical position and have a better understanding of the gold market you can start to take a position in the miners to benefit from the leverage they offer.
Dollar Cost Average By Buying Dips
The idea with dollar cost averaging is that you invest a set amount of money at a regular interval and buy regardless of the price. The primary benefit is that you take emotion out of the equation and that by buying at a range of prices you get a good average entry point.
While this can work and it may suit you just fine I recommend dollar cost averaging into gold but in a slightly different way.
Firstly I would identify the percentage allocation that you would like for gold in your portfolio. Then I would identify how long you wanted to take to build that position. If the price of gold was likely to be sideways or down over the next few years then you could take your time. If it was likely to rise, then perhaps you would want to take a shorter time period.
Then instead of setting up an automatic dollar cost average, I would dollar cost average manually, by trying where possible to buy the regular dips. It wouldn’t be possible to hit all these points perfectly but it will generate a better entry price then hitting lows and highs.
If you were expecting gold to rise in the near future, I would also be prepared to over allocate in the short term above your % target in order to get a better price, and then allow your savings over the next few years to grow your portfolio in other areas to bring down the % allocation. This way you avoid buying at a future higher price.
This of course has some risk as the price may not move in the direction that you expect in the time frame you expect.
This is what I did between 2014 and 2018 trying to buy the dips and over-allocating in anticipation of the price rise.
It’s been successful because I haven’t needed to buy any more since 2018 and my percentage allocation has come down to where I want it despite the rise in price.
This is because my savings since 2018 have either gone into crypto, stocks or stayed in fiat lifting the value of the rest of my portfolio and thus correspondingly reducing the percentage allocation to gold to my target.
Listen to People Smarter Than You
When it comes to investing your own intelligence is overrated.
Warren Buffett famously says that good investors succeed because of their temperament not because of their intelligence.
This applies to gold as much as it applies to stocks.
Being smart is helpful when it comes to investing, but it isn’t everything.
In fact, one of the best traits you can have as an investor is humility and recognise that no matter how deep your conviction is, you might be wrong and you might not be as smart as you think you are.
Since you are not infallible, it pays to listen to people who are smarter and more knowledgeable than you.
Not only can their wisdom and experience help you understand the gold market better, their temperament can rub off on you as well.
The people I listen to the most when it comes to gold are:
This also includes listening to Bitcoin Maximalists who understand the need for sound money but predict the demise of gold. I don’t agree with them, I hold both, but it would be foolish to not listen to their arguments and have my thinking challenged.
Form Your Own Opinion
Having just said, “listen to smart people” you also need to be able to form your own opinion.
This is because the experts may be wrong, or they may have conflicting opinions. That is entirely normal since no one has a crystal ball and no one can perfectly predict the future of the market. You will have to absorb all of the information and make your own call. And be prepared to be wrong.
The other reason you need to think for yourself is that the experts don’t know your own financial situation. Market commentary is just that, market commentary. It’s not financial advice.
They don’t know your position sizing, your entry point, your retirement goals or anything else about you. So you need to be able to filter the market commentary and apply it to your own situation.
This is particularly the case if you are a long term holder. Most market commentary is very short term. So if you bought years ago and are planning to hold for many years to come then you can safely ignore the short term market gyrations.
Have a Plan
You should always invest with a plan and it is not different with gold. This should be part of your broader financial and retirement plan and should be well thought out.
Buying and hoping for the best isn’t a plan.
Some things you should consider are:
- What is your goal with this investment?
- What are the risks with this investment?
- What will be your portfolio allocation towards gold?
- How long do you plan to hold your gold?
- What are the costs to hold your gold?
- What is your position entry strategy?
- At what price would you consider selling?
- If you sell, what other asset would you buy?
The plan will change and it will be fluid depending on your personal situation and what happens in the market. That’s okay.
But it is much better to have a plan and not follow it than not have one at all. A plan helps to give you discipline and reduces the chances of making emotional decisions. The more you can give structure and systems to your investments, gold included, the better.
Be Aware of Tax Rules in Your Jurisdiction
One key part of your planning that deserves its own section is tax.
Be aware of what the tax rules on bullion are in your jurisdiction, seek the advice of an accountant and plan accordingly.
For example in the US, the IRS considers gold a collectible and taxes it at a maximum of 28%.
For me in New Zealand, the IRD taxes profits on gold at the marginal rate.
An understanding of tax implications should form part of your overall investment plan.
Don’t Sell Your Gold for Fiat, Sell it for Productive Assets
If gold is protection against the debasement of fiat currencies then it makes little sense to ever sell gold for more fiat.
You traded inferior money for superior money, so why trade it back even if you have a nominal profit?
It makes far more sense to use your gold to buy a productive asset such as stocks or real estate. Gold is money and money should be used to invest in something that will generate a return.
(Of course fiat will need to be held in the short term to facilitate the trade from gold to stocks or real estate.)
So instead of watching the nominal price of gold in terms of fiat i.e. the USD chart, which really just tells you how quickly USD is losing value, instead you should look at charts that show the value of gold against stocks and gold against housing.
These charts are the Dow/Gold ratio and the Schiller-Case Home Price Index/Gold ratio.
These charts will give you great insight on when to buy and sell gold because they will tell you when gold is expensive or cheap relative to housing and stocks. This is much more meaningful than just looking at the fiat price.
Learn How to Value Gold
Since gold has no earnings it cannot be valued the way that a stock can. Yet instead of just buying gold by instinct, there are some useful ways you can attempt to measure the value of gold.
By using several of them in combination you should be able to get a reasonable picture of how over or undervalued it is.
The Price of Gold Relative to the Money Supply: A number of commentators and analysts use this method. They start with a metric such as the value of the Federal Reserve’s balance sheet or the money supply and divide by the number of ounces of gold the US government has. Jim Rickards actually calculates m1 money supply of the US, the ECB and China and assumes a 40% backing of the fiat money supply to gold to reach a figure of $10,000 per ounce.
Treat Gold like a Bond: Another method outlined by Charlie Morris is to consider gold as if it were a bond and compare it against the 20 year US Treasury. At first this may seem strange but it actually makes sense. Since real interest rates and inflation expectations influence the gold price the bond model helps explain medium term price moves and can tell you if gold is over or undervalued.
The Log Scale: A log chart is useful for looking at the long term price movements. Unlike a linear chart which measures dollar price movements, a log chart measures percentage price movements. When you plot parallel trend lines of the log chart, you can clearly see when gold is over or undervalued relative to historic trends.
Inflation Adjusted Gold Price: If you look at a chart overlaying the CPI against the nominal gold price you can see when gold is over or under valued. For example, between the 1988 and 2007 gold did not keep pace with rising inflation. Therefore by this metric it was undervalued. The wider the gap between the gold price and the CPI the more attractive the entry point.
However, because the official inflation measures are dubious, it is also wise to look at alternative measures of inflation. ShadowStats is a service that provides arguably a more accurate measure of inflation.
It is very interesting to look at gold charts that have been adjusted for inflation according to the ShadowStats CPI. Ronan Manly at Bullionstar provides a very good explanation with charts here.
Adjusted for inflation ShadowStats puts the 1980 gold price high at a little over $20,000, meaning that according to this metric gold is significantly undervalued.
Buying gold and hoping for the best is better than not buying gold at all.
But developing a deep understanding of the gold market and improving your investment skills will enable you to be a better gold investor and earn a much better return.
Gold is an asset with a long history and there is much to learn about this important market.
You don’t have to master every detail and nuance, but having a sound grasp of the basics of the gold market and investing strategies will serve you well.
Rickards, James. The New Case for Gold. London: Penguin Business, 2019.
Spall, Jonathan. How to Profit in Gold : Professional Tips and Strategies for Today’s Ultimate Safe Haven Investment. New York: Mcgraw-Hill, 2011.
Gold Chart by Trading View
Jerome Powell is in the public domain
Dow to Gold Ratio by Long Term Trends
Real Estate to Gold Ratio by Long Term Trends
Gold Log Chart by Trading View
Gold and the CPI from How to Profit in Gold