Over the past few weeks, major political and economic events have led to a sharp decline in stock prices and a sharp increase in the demand and price for gold.
Seizing the wealth creation opportunities that these market fluctuations bring is what savvy investors do best, according to Jeffrey Christian, MD of CPM Group and one of the top experts in gold research. He shares his views and insight with our Goldex readers, on how we can make money buying and trading gold – especially during periods of market price volatility – and why gold remains the best and most reliable investment option.
Tell us a little bit about yourself
I’ve been advising about investments in gold and other precious metals since 1980 to a range of investors including wealthy individuals, central banks, governments, mining companies, and gold using companies.
What I have witnessed and learned over the past 38 years is that those investors who trade gold as well as own it as a long-term portfolio diversifier earn better returns.
Why should we consider gold as a good investment?
Gold serves many purposes for investors. At the most simplistic level, it can help with capital preservation and capital appreciation. Capital appreciation is generating alpha, making money.
Capital preservation is beta: Diversifying a portfolio to reduce the overall volatility, the swings up and down, in the value of the total portfolio.
What insight can you share on how to manage gold investment for the best results?
We advise clients to view gold as providing them with several distinct investment attributes. Because of this we advise our clients and manage their accounts with different portions in mind.
. Investors should own some gold as long-term insurance against a host of personal and social problems that could arise, and as a means of diversifying their wealth.
. They also should buy and sell gold as a short-term or speculative investment, taking advantage of the constant fluctuations in gold prices. By harvesting small incremental profits on a daily or weekly basis, investors can generate additional wealth.
Can you make a profit speculating in gold on a short-term basis? Isn’t gold considered appropriate as a long-term investment?
We do get frustrated investors asking this question, but consider this: We have all seen news clips and movies of bank and brokerage trading floors where they are constantly buying and selling everything they can: stocks, bonds, gold bar, currencies, commodities, and more.
Why do you think sell-side banks and brokers, and buy-side fund managers have all those young traders frenetically buying and selling? They do it to make money. And, as we all have learned, banks, brokers, and fund managers are extremely well paid.
They succeed in making money. They don’t make a profit on every trade, but they make profits on enough trades to make it worthwhile. Also, they learn how to cut their losses when markets move against them, and how to take profits when prices move in their favour. They do not buy and hold. They buy, sell, buy, sell, and buy again and again.
If you actively trade any asset and do so based on a rational understanding of how financial assets trade you will lose sometimes and win sometimes, and you may, in the long run, chalk up some impressive returns: More money. Wealth creation. Capital appreciation.
The banks and brokers know this. That is why they go to the expense and trouble of hiring all those traders to sit there day in and day out buying and selling.
Does this mean we have to act like a trader vis a vis the film ‘Wolf of Wall Street’ to profit?
We never suggest investors get that intense in their trading. Some of our clients do, but most do not. In fact, we suggest the opposite to most investors. We tell our clients that good investments take care of themselves. You might buy gold on a Monday morning with the view that at some point over the next two weeks you plan to sell it.
Then you can look at the price every morning, or a couple of times a day, and sell it when you feel you have made a decent return on your short-term investment.
While some investors are pulling back from gold many others are still buying and selling. What’s triggering this investment behaviour?
Investors that have more sophisticated views of the world and investment markets are buying gold because the price is reasonably low while stocks and bonds are at record prices. Stocks and bonds look over-priced and vulnerable to sharp future declines. Rising interest rates spell trouble for both. So, too, does the probability of a global recession or worse at some point in the next year, or two, or five. Such prospects meanwhile suggest to many that gold prices might rise, as investors shift out of stocks and bonds, and the U.S. dollar, into gold and other assets that are not top heavy and have market profiles suggestive of higher prices.
The countervailing forces on gold prices of these two trends have kept gold around current levels for the past couple of years. The longer prices build this base, the more many investors decide to go long gold in anticipation of higher prices in the next few years.
What’s impacting the gold market now?
The gold investment market is at an interesting point at present. Some of the traditional gold investors – some of those who bought and held gold against a catastrophic failure in the global financial system – are selling their gold. They are disappointed that the world has not collapsed, even though they have been expecting it to do so for 10, 30, even 50 years. Sure, the world came close in 2008, but the masters of finance managed to save us from the worse consequences of their own incompetence and misfeasance. Other times, such as 1968, 1974, 1980, 1987, 1991, and 2001, we came close too. Each time, we pulled back from the brink. As a result, some of these buy-and-hold investors are giving up the ghost. They are not buying more gold, and some actually have been selling. Others are dying, and their estates are liquidating their sterile gold holdings.
As we explained in our last CPM Group market commentary, there has been a plethora of problems plaguing the world and various national economies, financial markets, and politics impacting the stock market and gold prices.
Our expectation is that, after the world steadied along in the middle of this year, markets would be concerned about economic downturns, financial market instability, and rallying global and national political storms beginning in the fourth quarter.
In our comment piece, we argued that although we could not predict what would trigger a return of more investors to gold and silver, some combination of factors should be expected to send a cold blast of nervousness through financial markets, with an associated increased interest in buying more gold and silver as portfolio diversifiers and safe havens.
Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this it does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.