Finance and Stuff

Thoughts on finance and other stuff by Johan Lindén

Month: August 2011 (Page 2 of 2)

Shortage of Physical Gold

How to handle the shortage of physical gold? 

I got my first reader questions yesterday.

gold shortage

I would like to own 25% gold in the next months, since I believe that a real market crash will occur that will ruin most of our financial markets. But first I think there will be a rebound so I only want to own 10% gold now. But as I already can see today, there are bottlenecks in how to get physical gold where I live. Do you have any suggestions?

A very good question! In fact there is a way to get around this problem, so the answer is yes!

With all the financial turbulence and buy recommendations we now get on gold from everywhere, the Swedish gold retailer, Tavex, as of yesterday, announced that they, were out of gold.

However, these alarming signs usually means that we are coming to a temporary plateau for the gold price, and that you will most likely have plenty of days to buy your physical gold. But I want to stress the word usually. But do not panic and see what I would have done in the example below:For example let us say:

  • You want 1000 oz. of physical gold as a maximum.
  • Today you think that the gold market has overreacted, but just to be sure you want to own 500 oz.
  • So you buy that 500 oz. today electronically.
  • When you get hold of your 1000 oz. of physical gold you will have a total of 1500 oz. of gold, which is 1000 oz. more than you want today so you go short/sell 1000 oz. of gold electronically.
  • Now you are 1000 oz. invested in physical and minus 500 oz. in electronic gold for a net of +500 oz.
  • Finally when you think that you want to be fully invested you buy back those 500 oz. that you shorted in the market.
  • Then you own 1000 oz. of physical gold, but zero oz. of electronic gold. You are safe!

 

If there is to be a real panic. Let say the stock market crashes 10% three days in a row. At that time there may be a real shortage of physical gold for some time and you may even have to buy it significantly above market price to get it.

The only downside to this strategy is that this will add a slight transaction cost, but it guarantees me that I will own the right amount when the time comes without having to think about where and how to get it. And at the same time it will let me have some room to ease my position when I think that the market has overreacted.

 

By hedging my physical gold with electronic gold I will:

  1. Easily always have the amount of gold that I want at any time by regulating it in my trading account. 
  2. Be fully secure in case of that my bank or brokerage firm goes down.
  3. Have instant access to my gold at all times.

Keep those questions coming.

See my previous article about investing in gold in general

Reasons Why The Economy Got Bad

One of the most powerful figures in finance thinks that printing money is a way to save the economy.  

Alan Greenspan, the ex chairman of the US Federal Reserve Bank and one of the most important figures in finance for the last decades, thinks that printing money can save the US economy.

Obviously he must think that the US is the only country printing their money, and that the other parts of the world still use gems and gold to do their business. No wonder we are in a bad shape.

Enjoy the video!

[youtube_video=http://youtu.be/R21pkWbX6nM&rel=0&w=570 rel="nofollow"]

The Most Heavily Taxed Countries in the World and the Winner Is…

Here is a list of the countries whose citizens’ financial freedom has been revoked the most by its government. The 15 highest taxed countries in the world are:

Chart of the most heavily taxed countries in the world

 

 

Source: http://turbotax.intuit.com/

 

Should I Buy Gold?

gold investmentShould one buy gold today?

The short answer is, yes!

Nowadays, as always, when a commodity enters new all time highs, many recommendations shows up for that commodity. But for reasons given below one should always own gold.

Any person who wants a diversified portfolio, a.k.a a well-balanced healthy portfolio, should always own gold! It has been a trustworthy holder of value for mankind for thousands of years and will probably be that for the remaining of yours and my life. It may not always have been the best investment, but that is not what you are primarily looking at when buying gold.

Do you have a home insurance? Yes? Well, that is not a good investment either for the average insurance buyer, but you still want it for security if something goes really bad. Same thing with gold.

If the currency, banking or financial market, that we so much depend upon will crash, and it will someday, people will seek the most long-lived currency available. And that is gold.

But the gold price has risen so much, is gold still worth buying?

I do not agree that a certain investment is bad because it has risen a lot, but I agree that when things look gloomy it is a good time to take on risk, and when things look good you should be more risk avert. Those times are when you get the best prices for each of those investments. And looking at the media for the last year or so, things look pretty bad, and for that reason people may have overinvested in gold.

However, I do not think that the economical damage is taken as seriously as it should be by the majority of todays actors. People still have a deep belief that governments and the whole system can heal our financial markets by known measures, such as bail-outs, interest rates cuts, lending, spending, and now, paradoxically, saving. So yes, it is always important to have gold in a balanced portfolio, especially since this post is about owning gold as a financial insurance.

How much gold should one own at any time?

That is totally depending upon your risk aversion or your need for safety. Somewhere between five and twenty percent of your wealth should be a good estimate. Note that when we talk about these percentages of a person’s wealth one most include real estate and other illiquid assets, such as partnerships/businesses.

Note that this is about buying gold as a financial insurance. So do not wait until you think you can buy it cheaper, buy it because you want safety and want to be ready if something happens quickly.

If you still feel secure about your wealth and income and only want, let us say, a 5% long-term investment, but still want a 10% speculative holding, you may of course buy that 5% percent now and wait until you get your trading signals or whatever you use to buy the speculative holding.

How can a small gold investment of 10-15% be good enough if things go bad?

It is impossible to give a scientific value. Because in economics you cannot do that most times. That is the downside of economics, but also the reason the be cautious when taking financial decisions. But let us say that things go really bad and currencies all over the world run into hyper-inflation, then gold may not raise a hundred or two hundred percent it may well increase tenfold. That is not unlikely at all if people lose their faith in fiat (paper) money.

Example:

Pre-crash you own:
Money, Stocks, Bonds: 850
Gold: 150
Total investments: 1000

Boom! A financial crash occurs! Your investments are down 75% in just a few days. All people seek the best storage of value. Gold quadruples.

Post-crash you own:
Money, Stocks, Bonds: 213
Gold: 600
Total Investments: 813

Even if you have a slight decrease of your wealth it still looks a lot better than if you have not have owned gold, and more importantly compared to your neighbors or society as a whole you are not ruined.

Can one not buy a house instead of gold to preserve wealth in an inflationary environment?

Sometimes you can, but a house is not a liquid asset someone can bring with him. And that is a real disadvantage in times of financial crises. Economical and political turbulence may make people want to relocate. Maybe your country is going down harder than others. Maybe there will be tough to get a job where you live. Even if that will not be the case, your presumed house buyer may have these doubts and that will be reflected price.

Should I buy real physical gold or can I buy it electronically?

Some people reason that if you want to be really safe, you should buy physical gold and hide it in a safe place. That is good if things goes bad quickly and you do not have a few days to cash out your electronic accounts. Fine, then buy it and dug it down in your garden. But be sure to make a pirate map for your kids if you should get a sudden heart-attack. If you are careful you can buy it on the financial markets first and then change to physical gold when you think that it is not safe to trust your broker.

How can one easily invest in Gold?

You buy gold on futures through Comex (only big professional accounts for traders) in the US, or you can buy through LMAX if you click on the banner on the top right side of this page or click here.

Remember, as a long-term investment, it may not be the best. Actually it have not been good for many decades as you can see in this inflation-adjusted chart below. But as an insurance for the smart investor, it as a must-have.

gold inflation chart

If you have not checked out “Are You a New Reader?” please do that and send me some feedback. Thanks!

Ten Characteristics of Successful Traders

What does it take to be a good trader? I think most traders do not even bother to think about that question. But it is key to success to understand what characteristics is needed to make you excel in your choice of career.

The renowned trading coach, Brett Steenbarger, Ph. D, pointed out ten characteristics he had seen in the successful traders he had followed. Five of them are:

  1. The amount of time spent on their trading outside of trading hours (preparation, reading, etc.)
  2. Dedicated periods to reviewing trading performance and making adjustments to shifting market conditions
  3. The ability to stop trading when not trading well to institute reviews and when conviction is lacking
  4. The ability to become more aggressive and risk taking when trading well and with conviction
  5. A keen awareness of risk management in the sizing of positions and in daily, weekly, and monthly loss limits, as well as loss limits per position
Read about the other five traits in his article:  http://traderfeed.blogspot.com/2009/10/ten-characteristics-i-see-among.html

Quotes of Market Wizards

I will open this blog with a recommendation to all people serious about trading or financial markets to read the book Market Wizards by Jack D Schwager. This is surely a must-read or as I refer to it as the Bible of trading.

trading quotes market wizardsThe whole book is just a series of interviews with the most successful traders of the 1980’s and is very easy and entertaining to read. It was interesting to read that all traders was very successful using totally different strategies. However, looking back at the book, I found one common trait they all shared while making their millions or billions. They were all risk avert. That might be something to think about before you double your position during your next unsuccessful trade.

I will most certainly get back to this book later on, but today I will share some thoughtful advise given by these Market Wizards. Enjoy!

The most important rule of investing is to play great defense, not great offense. Every day I assume every position I have is wrong. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. Always maintain your sense of confidence, but keep it in check.
-Paul Tudor Jones

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose.
-Bruce Kovner

Many people actually want to lose on a subconscious level.
-Dr. Van K. Tharp

The realization that you are responsible for your results is the key to successful investing. Winners know they are responsible for their results; losers think they are not.
-Dr. Van K. Tharp

My Marine training helps in investing. They teach you never to freeze when you are under attack.
-Marty Schwartz

Investing is like poker. You should only play the good hands, and drop out of the poor hands, forfeiting the ante.
-Gary Biefeldt

Fundamentals that you read about are typically useless as the market has already discounted the price. I call them funny-mentals. However, if you catch on early, before others believe, then you might have valuable surprise-a-mentals.
-Ed Seykota

If you make 50% two years in a row and then lose 50% in the third year, you would actually be worse off than if you just put your money in a money market fund. Wait for something to come along that you know is right. Then take your profit, put it back in the money fund, and just wait again. You will come out way ahead of everybody else.
-James B. Rogers, Jr.

Most traders who fail have large egos and can’t admit that they are wrong. Even those who are willing to admit that they are wrong early in their career can’t admit it later on! Also, some traders fail because they are too worried about losing. I’m not afraid to lose. When you start being afraid to lose, you’re finished.
-Brian Gelber

I hope you enjoyed some of these quotes from the book. Even if you learn only one thing from these masters, it may make the difference whether you will become a winner or loser in the end.

If you have not checked out “Are You a New Reader?” please do that and send me some feedback. Thanks!

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