Don’t Speculate on Gold

Do you speculate on gold? Or do you invest in it?

I
hope for your sake that you do neither.

Yesterday I discussed
why the Euro, and eventually the dollar, will crumble.  So, you probably know
you should own some gold and silver.

But knowing why you own it is almost as important as owning it.

Because if you buy gold and silver for the wrong reason, you’ll probably sell
for the wrong reason. And in finance, these types of choices tend to be binary.
So if you’re buying and selling for the wrong reasons, you’ll probably lose
money.

First, you need to understand the difference between investing and speculating.

Incidentally, both have a place in anyone’s portfolio. But if you speculate when
you should be investing or visa-versa, you’re again, probably buying and selling
assets for the wrong reasons, and again, you’ll probably lose money.

And the difference between investing and speculating is something 90% of
investors just don’t understand. Most investors believe that the whole point of
buying an asset is because it will go up in price tomorrow. It’s a reckless,
short-sighted and dangerous way to allocate your funds.

Value investing legend Benjamin Graham defines an investment as an operation or
business that "…upon thorough analysis, promises safety of principle and a
satisfactory return."

True investors don’t care about daily or even monthly price movements. They
don’t care because they’re collecting income streams on their investments that
provide a reasonable cushion. This cushion lets them ignore the markets for
months on end.

So, right off the bat, gold doesn’t qualify – because it’s not a business or
operation, and because gold does not promise any return. You buy gold
because you want to preserve the value of the capital you have.

What about gold as a speculation?

I
recognize that many people buy gold as a speculation. What is a speculation? In
simplest terms, a speculator buys an asset today because he believes the price
will be higher tomorrow, and he’ll be able to sell to a greater fool.

Again, there’s no reason not to include speculations as part of your portfolio,
but they should comprise the smallest portion of your portfolio. It’s the money
you will not miss – and you should speculate on assets that have a chance of
returning your money to you many times over.

But that’s not a good reason to buy gold. Because until you find a greater fool,
you are he. That’s not any way to treat a significant portion of your portfolio.

And as I said above, you can’t reasonably hope to sell your gold for "more" than
you bought it for. The whole idea of gold ownership is to protect the value of
your capital.

So what is the function of gold in your portfolio? Think of it as cash savings
that will never be inflated away. It’s the answer to the question "what should I
do about sovereign debt problems around the globe?"

It’s not an investment. It’s not a speculation. It’s liquid cash savings
completely outside the control and ambition of politicians and central bankers.
Keep it close and keep it safe. But also understand why you own it.

This type of understanding will help you buy and sell EVERY asset for the right
reasons. And you’ll give yourself a better chance at profit and prosperity.