Going “All-In” in Gold?

Things are really starting to get interesting. The U.S. got its credit outlook downgraded by Standard & Poors and gold is knocking at the door of $1,500. This is the exact opposite situation all the gold bubble experts expected. When people call gold a bubble and U.S. Treasuries a safe haven, they have things backwards. Almost 2 years after the recession “ended”, sovereign debt concerns are starting to reappear. These debt concerns will not go away anytime soon; in fact, they will get worse as time goes on.

We all have to try our best not to get lulled to sleep by incessant propaganda about a recovering economy. I’ve spoken to a lot of people about this debt crisis, and many say something along the lines of  ”I believe in theory, but damn, that’s crazy.” These are  words of inaction; inaction is not going to protect you from this crisis. When it hits the fan and you start panicking, it will be too late. Gold will already be on a rocket ship to new highs above $2,000. For gold to go above $2,000, only a small percentage of people will have to move their assets into gold. This is still a rally that the public refuses to participate in. Institutions are also late to the party.

Words of Warning

I don’t really read too many other gold-related blogs so I don’t know what they are saying. But in general, it is wise for those who have already profited greatly from gold to think about diversifying their assets. This might sound crazy coming from someone who went “all-in” on gold, but it is the right play. I know that psychologically the urge will be the greatest to buy gold at the very top. Understand this beforehand. Investing is not about absolute returns, but risk-adjusted returns. I think most of your position in gold should have been in place sub-$1000. For the latecomers, the $1,000-$1,300 range is fine. But to add a majority of your position above $1,500 is something I would not recommend.   

I’m always baffled by how people don’t position themselves when the opportunity is there, yet they have no problem piling onto a trade when it’s too late. This might be a little confusing to people who know I am a gold bug, so let me try to explain.

When you hear experts on gold talk about how gold is going much higher, understand that they are in a different position from the average person who is just learning about gold. Many “gold experts” were positioned at $500, so they already have profits of 200%. I would assume most of these gold experts have shares in gold companies as well, so let’s say conservatively that their profits are 400%. At this point, they effectively have an option on gold (if they’re smart) where they can define their downside while profiting from the upside. They can put a mental stop at $1;000 and still come away with a sizable profit. People who are just learning about gold just don’t have this optionality. Gold at this point should be viewed as more of an insurance trade. That’s all I’m trying to say. It is probably not smart to go all-in even though $2,500 is a conservative target.

I will try to get out of gold at an opportune time. I personally think that time is years away, but you never know. In the meantime, I will try to point you to other opportunities. As I’ve stated before, real estate in distressed markets is starting to interest me. We are about to enter a big inflationary cycle,and I think housing is going to participate. The average person can hedge against inflation with a 30-year fixed mortgage at under 5%. I believe the more financially savvy will snatch this opportunity when the numbers make sense. Gold is still a double from here, but I think real estate is a double too on a cash-on-cash basis. We’ll see how these trends unfold. I will try to stay open-minded throughout this process, and I urge you all to do the same.   

Going “All-In” in Gold? is a post from: Expected Returns

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