When And How To Invest In Gold

Waldemar Meyer
March 25, 2020

Dear Bar9 customers,

unfortunately, we all live in extremely uncertain times. And the so-called “markets” in particular are also showing signs of nervousness: the price of gold, for example, goes up sharply one day, only to go down again the next. At the same time, almost all major gold traders have closed, which means: if you want to buy gold at the moment, you will not get anything even with high premiums. The same applies if you want to sell. The good news: On Bar9 you still can buy or sell gold as of today the 24 March. But should you buy gold now in the crisis? Or should you rather take advantage of the high prices to reduce your gold holdings and make cash?

1. general

Gold has been the last lifeline for savings for 3,000 years. In the modern world, gold is considered a “lender of last resort” because, when you own gold, you are not dependent on anyone: no bank, no insurance company, no counterpart who has guaranteed that for a piece of paper which you hold in your hands you will later get something real. Professionals say that gold is one of the few investments that has no “counterparty risk”. This is what makes gold so attractive in times when, for good reasons, one must be sceptical about individual banks, but also about the financial system as a whole. There are currently dozens of arguments for owning gold and quite a few, particularly experienced market participants assume that the price of gold and also silver will rise significantly in the long term.

2. special features

Many believe that in such a crisis, where people queued up in front of the branches of gold dealers (until they closed), the price of gold should move forward in only one direction: upwards. But that is not true in a general sense. Because the physical demand for gold is one thing. The world gold price, as determined every few seconds on the exchanges, is the other: On the commodity exchanges, almost no physical goods are traded, but so-called “futures”, i.e. virtual derivatives, financial bets on gold. And this is where two factors come into play, which from time to time ensure that the gold price collapses apparently “surprisingly” in the middle of the most severe crises:

  • Central banks intervene (unofficially) in the markets to keep the gold price, which is a typical “panic indicator”, calm and weaken it. These interventions usually occur during trading hours in New York trading and push the price down, sometimes by a few percentage points, within a few minutes.
  • In severe crises, major investors at some point also run into liquidity shortages and start selling off everything they have left. These are days in which, for example, on one and the same day the stock market crashes and gold falls like a stone.

Such phases, which make gold investors very insecure, usually don’t last too long. Whoever experiences something like this for the first time will be very frightened. Below you see what happened during the financial crisis 2008: First, the gold price got hit by a market liquidity shock, after that it started to heavily recover:

3. decision support

Do you want to buy gold or not? If you are a normal investor and saver, the daily gold price is not important for answering this question. Instead, you should add up all your savings and investments and see how much physical gold you already have in your total savings portfolio. Gold serves as a stabilizing factor in your savings, as an “insurance” when all other financial investments with counterparty risk start to wobble. Therefore, it is generally said that the proportion of physical gold in your savings should be around 15% to 25%. – You should determine the amount mainly according to how optimistic or pessimistic you are about our financial and banking system.15% to 25% – this good old rule will help you decide whether you should buy gold now or reduce your gold holdings. By the way, unfortunately, most savers in the world have not structured their savings in such a way that they can ́t be hit too severely by a financial crisis!

4. settlement

So if you have set an amount x you want to own in gold, should you buy today because the price of gold will be higher tomorrow? Well, really none of us can see into the future and no one knows where the gold price will be in the coming weeks – even though some analysts and market criers are happy to give you the impression of perfect wisdom. That is why the classic “rule of thirds” is recommended: Take the amount you want to invest and divide it by 3. Invest the first third today, the second third in a few weeks and the third again a little later.

This will give you an average price for your gold holdings through all the price fluctuations. It is important that you remain consistent and stubbornly follow through with your plan. Stay as unemotional as possible and do not let yourself be guided by daily headlines. By the way, the “rule of thirds” also applies analogously in the opposite case, if you want to reduce the gold share of your savings.

You will see: People who own physical gold react much less panicky than those who have invested their savings exclusively in bank-dependent products. Gold helps you sleep better and increases your personal sovereignty. Act similarly confident and planned when building up or reducing your gold holdings! We hope this article has helped you in this respect.

Waldemar Meyer
Head of Trading Bar9 GmbH

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