We were asked to comment on a specific long-term investment plan, one for the next 10-15 years. Namely, the question was about purchasing 6,000 oz of gold, keeping it and using it for everyday expenses. While we can't reply directly to a given person if that is a good idea specifically for them, because that would be an investment advice and we can't provide such, we will do our best to discuss the question in general terms for the benefit of likewise-leaning persons.
First of all, in our opinion, it's not a bad idea. A bad idea in our view would be to keep it in cash and let inflation slowly eat it away. An even worse idea would be to use one's entire capital for aggressive trading with huge position sizes and immense leverage. Or to pick up shares in just one or two junior mining companies based on some investment forum gossip and becoming a victim of a pump-and-dump scheme or plain old corporate management risk.
So, purchasing 6,000 oz of gold is not a bad idea as it avoids many pitfalls and dangers that a partially informed investor might fall for.
But, is being "not bad" enough to be good? And how to define "enough" in general? Long-term investments are a very important matter, and one needs to make decisions with utmost care. "Not bad" will be a good choice when buying a t-shirt. But will it cut it when determining what to do with one's life savings?
Actually, it depends. It depends on many factors, but the key thing seems to be how much would one really needs and how much one has. If you have billions and you only need millions, then it's probably enough. If you have millions and only need thousands, it's also likely enough. But good luck finding anyone who has millions and would be satisfied with thousands.
Most people who say that they don't want more capital, say so only until they realize what more capital really means. Preserving capital seems like a nice goal, until people think what more capital means. Their lifestyle improvements, the financial security, or helping to secure their children's and grandchildren's future. Here's a firsthand example. Even though I could afford a nice "shiny" new car for a long time, I didn't buy it, until I realized how much safety the extra airbags in the backseat row mean. What about the stress and health in general? A nice vacation every few months wouldn't hurt. Just ask your significant other. Tuscany is pretty nice this time of the year...
Solution: Check for investment plans that are likely to outperform gold, thus likely providing greater returns.
But if I just buy gold and it then appreciates in value over time I should be fine...
That may very well be the case. But you know what else might happen? Market can fluctuate - that's what markets do in general. Buying gold at $1,800 or so and then waiting almost a decade only to see it at $1,300 would almost definitely be detrimental. Stress causes so many adverse effects to one's health that it's hard to count. A losing decade might have easily caused one of many unfavorable health outcomes, and/or it could have caused family arguments regarding the investment choice. And that's not even counting the losses themselves.
Fortunately, gold is not at $1,800, but close to $1,300. Still, based on myriads of factors, it seems that it's on its way to about $900. At this time, it seems that gold will move there in the next several months and then start to move back up. But... What if the outlook changes in the next couple of months and it turns out that we will have to wait for the rebound for much longer?
Solution: Having investment plan that takes one off the market if a big move lower appears likely.
The worst thing is that the market is not the only thing that may change. What if something really bad happens out of the blue in the meantime? Imagine that yourself or someone you love gets seriously sick, or has a serious accident that requires immediate - and costly - medical care. You'll definitely fall back on your investments to help. But would that mean selling at the desired price? No, you would sell at whatever price the market currently offers, because it would be urgent to get cash. It wouldn't be that bad if it happened after a gold rally above the purchase price. But, what if it happened during the move down? In such a case, what might have otherwise been a sizable but still reasonable correction within a profitable upswing, could become a move that erases almost the entire investment position. Hopes for stable future would go down the drain along with it.
Moreover, just because today the odds favor a certain market outcome, doesn't mean that the same will be the case also in six months. Let's keep in mind the period that we're discussing here: 10-15 years. You know what was unthinkable 5 years ago? That Donald Trump would become the U.S. President. A lot of things can happen, and setting an investment plan in stone without timely reviews and adjustments based on changes in circumstances can cause severe trouble.
Solution: Reviewing one's strategy periodically or having someone trusted do it.
To summarize, buying gold with the buy-and-hold approach while spending it along the way seems to be a very good idea at first sight, but taking a closer look reveals that while it's not bad, it could be greatly improved. In other words, there are areas where this simple plan aiming to profit on a long-term uptrend in gold is not likely to perform particularly well.
Gold's long-term performance is likely to be good, but the performance of a precious metals portfolio consisting of: gold, silver, gold stocks, silver stocks, and junior miners is likely to be even better and this article discusses it in great detail.
Taking a more active approach than a simple set-and-forget investing can also help to outperform and gain flexibility in light of less predictable changes. You will find details on how we fared over here.
There is also a dimension of the precious metals market that a simple buy-and-hold-gold plan entirely ignores. It's the difference in performance that we can see in mining stocks and silver. Miners tend to outperform in the initial part of a given upswing, while silver tends to catch up - this may seem simple, but it remains efficient as very few people know this (plus, we haven't disclosed the formula for our silver-miner indicator). As our research shows, by moving from one part of the precious metals sector (mining stocks) to the other (silver), it's possible to multiply the buy-and-hold gains while remaining invested in the precious metals market at all times. We have described this technique as buy-and-hold on steroids.
It is our opinion that an actively managed precious metals investment portfolio (one that reflects major changes in the long- and medium-term trends) is a far superior approach to a simple buy-and-hold strategy. On the surface, the latter appears simple and easy to execute, but the former takes into account more of the unpredictable changes, and is likely to outperform - bringing more profits, robustness, and diversification. The end result is a greater peace of mind.
Finally, a word of disclaimer: I may be biased, as I'm applying the above-mentioned techniques in my private precious metals investment fund with regard to my own and my clients' investment capital.
To keep informed of both the market changes and our trading position changes exactly when they happen, we invite you to subscribe to our Gold & Silver Trading Alerts today.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care