The Secret of Long-Term Gold Investing

by Investing School on February 22, 2012

Gold is volatile market. Anyone looking at a chart can see this – huge growth, huge drops, and enough volatility to bring concern to almost anyone. That’s one reason cash is still the most desired short-term safe haven of all.

 Still, unlike paper currencies, gold has the best long- long-term track record of all assets. If you owned a truckload of gold in 1776, you would have been about as rich as you’d be right now, roughly speaking. Gold prices have staying power – even though they have some swings in the short-term run.

It’s not even a fair fight. Over the long run, gold is the best safe haven asset, period.

And that’s what the secret of the gold market really is – understanding how to invest in a market that is volatile in the short run, but steady in the very long run.

Investing is More Than Knowing the Distant Future

John Maynard Keynes was an incredibly controversial economist. Those who understand how inflation works can attribute many of the economic ills that the West faces to his philosophy and approach to economics, namely the idea that one can spend tomorrow’s money today and get rich doing it.

Either way, he was a fantastic investor even though his understanding of economics was broken. At one point, he explained something that many precious metals investors should understand: “Markets can remain irrational longer than you can remain solvent.”

It’s true. It’s also why no investor should bet the farm on a “sure thing” economic event of the future. The economy might do something “irrational” for quite some time — in the meantime either leaving you with a lost opportunity cost or destroying your position altogether.

Many gold bugs have been predicting a collapse of the dollar for literally decades. They would have been better off with balanced portfolios during all this time. Because markets can remain irrational longer than you can remain solvent, after all.”

The Golden Lesson of 1980

This isn’t the first bull market of the last 40 years. The last one was throughout the 1970s. Nixon had recently ended the gold standard completely, meaning that our money was essentially just paper and that was it – and that had led to massive fears of hyperinflation, the end of the dollar, and other fears.

Honestly, it was a lot like right now – with a few exceptions, of course. No two economic environments are the same.

But about thirty years ago, plenty of people were pro-gold and were convinced that gold prices were going to keep having another decade of gains like they’d just had. Many put their life savings into gold. In 1979, things were great for gold investors as they had been raking it in for years.

Suddenly, in 1980, the Fed drastically raised interest rates. The price of gold began to tumble. Then tumble more. Soon it was an all-out panic, and plenty of gold investors were destroyed.
Many of the investors didn’t know how to process the event. After all, gold was the ultimate safe haven, right? Well, only for the long, long term – in the short term, you can still go broke betting on gold. And that’s the golden lesson of 1980.

The Secret of Long-Term Gold Investments…

The secret to a successful long-term investment in gold is understanding that it’s not a short-term safe haven and knowing that the only predictable thing you can know is that it’ll likely worth more in 50 years than it is now – albeit just slightly.

For investors like myself who are all about building boring, passive portfolios, that means making gold a set percentage of the portfolio, and never speculating about the short term stuff besides that set percentage. This uses the power of re-balancing and dollar cost averaging to get healthy profits as well as some long-term stability and insurance in an uncertain world.

There are plenty of strategies that are based on this “set and forget” approach to gold, with a popular one being the Permanent Portfolio strategy. It’s essentially a strategy that has essentially kept up with stocks since the 70s with much, much less risk and volatility.

Either way, raw speculation is a great way to go broke, as many gold investors learned in 1980. If those same investors had used a “set and forget” approach to long-term investing, they would have still retained profits and done just fine – if not, they still wouldn’t have recouped their losses, after accounting for inflation.

And that’s the secret of long-term gold investing. Gold, by itself, is incredibly risky. Gold, mixed with stocks, bonds, and cash – is a stabilizer and a type of investment insurance. People who understand this can make more money over time with more security.

About the Author: Shaun Connell is an investor and publisher who is a huge fan of gold, silver, and other hard assets. You can learn more about him at Live Gold Prices where he writes about the price of gold as well as the oil-gold price ratio.

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