In the last six months there has been an avalanche of advice from the financial industry telling you, as the private investor, to hold some gold in your investment portfolio. If you are one that has followed this, then today you must be feeling a bit sick. During this time the price of gold bullion has dropped by 25%. The argument for holding gold was good. If the financial world was to collapse again, then gold is an insurance against the destruction of paper currency. Even if there were not to be a collapse then the demand for jewellery from the growing Emerging Market populations should cause the price to rise. I do not have any disagreement with these arguments. The question is, just when should you make your purchase?
Why would you buy when the price is falling? How do you know when it will stop? Why would you try to guess the bottom of the market? Last week an acquaintance of mine said he was going to buy because it had fallen so far, surely it could not fall further. Well in the next three days it has fallen a further 10%! I would suggest that you simply watch the numbers on a graph and stick it out until the price of gold makes a positive upwards move. Leave prophesy to Gypsy`s, members of the Church and Politicians. Better still why not follow the numbers produced by the Saltydog Investor.
A useful investment maxim to remember when markets are volatile and unpredictable is one that I believe has its origins in Africa. “The best time to plant a tree is twenty years ago, but if you have failed to do that, then the next best time is now.” Investing is all a question of time perspective. At the height of the 2008 financial crisis Warren Buffett put the situation into his own perspective. He said that during the previous one hundred years, the USA had been through the Great Depression of the 1930`s, a great many conflicts including the Two Great World Wars, oil and financial crises, but yet the DOW index had still risen by more than 1750% over this same period.
It is difficult to constructively read the financial commentators at these volatile times, with their different and sometimes totally opposing views on the same situation. The world however needs the comments of both the optimists and the pessimists. Remember the optimist invents the airplane and the pessimist the parachute. If we did not have both the “bulls” and the “bears” operating at the same time, then the market would cease to operate as a market. They act as a counterbalance to each other forcing us to examine whether our glass is half empty or half full.
As an investor you must accept that some level of market turbulence is part and parcel of your life. However in Hurricane conditions there is no shame in being tucked up in port, safe in a risk free asset such as cash. The storm will start to abate, and then the policy of being to cautious may be the greatest risk to your long term wealth. It will be difficult to maintain the purchasing power of your money if it is invested in risk free assets for any length of time.