How To Invest In Gold

When you’re deciding how to invest in gold, there are a number of factors that may enter your mind.  These include whether you should be buying phycial gold, gold stocks or gold coins and other forms of gold. And, while all of these factors are very important, they will not teach you the process for learning about investing in the precious metals markets.

There are 3 things that you always want to consider upfront, when entering the gold market. Remember that gold is a very volatile market, sensitive to political, economic and currency events.  And, even though the current gold bull market has been rising for more than a decade, there have been severe corrections along the way. So, before you just jump into the gold market, consider these factors when deciding how to invest in gold.  Following these steps will form a strategy whereby you can easily build a core portfolio position in gold without having to worry if your timing is perfect.

Learning this process will also help you down the road whenever you want to sell a portion of your gold holdings. So, here are the steps. (Note: The same principals apply to silver as well) So, here are the steps.

1. Determine Your Allocation First The first thing you want to determine is how much of your overall investment porfolio you want to allocate to gold. If you are just getting started with precious metals, I’d suggest starting with 5-10% of your portfolio. For example, if your overall portfolio is $100,000, consider buying $5,000 – $10,000 of gold.  You could buy more or less depending on how much you believe is appropriate for your risk tolerance, but 5-10% is an overall good place to start. You can always adjust this down the road at a later date. But be careful not to allocate too much and in some cases too little so that you miss the objective of investing in gold in the first place. When in doubt, go with the smaller figure; you can always adjust it later.

2. Dollar Cost Average Into Your Position From Step One

Once you have determined how much of your portfolio you are going to allocate to gold, you should consider dollar cost averaging into the market over a period of time. Using our example from above, if you have $10,000 to invest out of $100,000, you could invest $1,000 per week over the course of 10 weeks, one “chunk” at a time. Or, you could invest $1,000 every other week. The key to this is consistently. Make it a plan.

The reason you should dollar cost average when buying gold is that gold is inherently volatile. You want to lower your risk. If you were to invest all of your money at once, just before a big correction in gold,  you may become emotional and quickly sell out of your position just as fast.  This brings us to our final step.

3. Expect Volatility and Don’t Invest With Your Emotions -Yes, I realize this is easier said than done. Remember that gold has been in a  steady and rising bull market over the last decade. But don’t let that make you believe it’s been a smooth ride.  Throughout this time, there have been gut-wrencing corrections that have caused nervous investors to sell out of their positions too soon. This is usually just before the market is about to improve. So, if you’re going to buy gold, consider the dips that inevitaby occur.

Let’s take look at the 10 year chart of gold to illustrate this point more clearly.

You can see that in the middle of 2006, gold had a major pullback that lasted for over a year. This was after rising for a full year, from 4/2005 to 4/2006. Then you can see that around the end of 2007, gold took off, only to experience it’s most serious correction of this bull market in 2008. It is important to realize this so that you don’t let your emotions force you to make irrational decisions. The saying: if you can’t stand the heat, get out of the kitchen, most surely applies to gold. Just be aware of your tolerance for risk.

In summary, use these 3 steps to your advantage. Don’t let their simplicity fool you.  Steps 1and 2 need to be written out as part of a plan. Step 3 is more of an awareness factor and things not to do. This is where a lot of would be profitable investors end up hurting themselves.

Applying these 3 steps should help you figure out how to invest in gold and make you a profitable investor for years to come.