Sunday, December 18, 2005

Don't Buy Gold on Margin!

As we enter what many are calling the second leg of the gold bull market we can expect very sharp movements up and down in the gold price, such as the recent run up to $540 and then the quick retreat back to $500 support level. This type of movement in the gold price is normal in a gold bull market and was experienced in the bull market of the early 1980's.

Should you be concerned about these sharp movements in the gold price?

As long as you DON'T BUY GOLD ON MARGIN, then no, you have nothing to worry about.

Here are two views as to why you shouldn't buy gold on margin. The first is from Richard Russell who only buys gold coins and doesn't trade gold. The second is from Jim Sinclair who trades gold and also buys gold coins.

Richard Russell's view on gold has been posted by James Turk at James Turk speaks very highly of Richard Russell and in particular his track record on forecasting financial markets that have been published for the last 30 years in his Dow Theory Letters.

Richard Russell says "I don't buy gold futures. I don't buy gold on margin. I don't buy gold puts or calls. I don't trade gold. Therefore, when gold ran up to $540 on December 12th, I didn't get excited. And then when gold dropped to just above $500 yesterday I didn't get depressed. You see, on a daily or even weekly or monthly basis, I don't give a damn where gold goes. I don't care because I'm holding gold in terms of years, not months or weeks or days. And I own it outright. I don't own it the way half of America own their homes -- namely, on (mortgage) margin."

Read the entire news letter here.

Jim Sinclair whose website is also has a similar view about buying gold on margin:

"For your sake -- DO NOT SELL INTO WEAKNESS -- unless you have committed the zero tolerance gold offense of margining yourself into a weak hand. Anyone other than a professional with 46 years of experience that trades futures on anything above a 50% margin is a world-class TURKEY waiting to have his/her feathers plucked by the pros.

The floor traders in this zero-sum game make a living by taking away your living. Your game is to play the market as investors, as aggressive investors by selling into strength and buying into weakness. Never, ever put yourself where many are today -- in total terror, caused by the margin clerk. Never, ever meet a margin call, because that nuisance, the margin clerk, is in reality your best financial friend. When he/she says send money -- don't. Just leave the table."


If you really want to profit from the gold bull market, simply spend 10% of your money each month buying gold coins and gold bullion, or if they are too expensive buy silver ounce coins or rounds.

Don't concern yourself with the fluctuations in the gold price along the way, as the gold price is going much higher, and you will look back in a few years time and realise that it makes little difference if you buy gold coins at $500, $540 or even $750, you will still make amazing profits and you can sleep at night knowing that your gold investment isn't going to disappear due to a margin call when the gold price drops back a little during one of the inevitably up and down movements to come during this gold bull market.

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