How do gold investors make profit?
This post is dedicated to those who wish to capitalise on the ‘buy low, sell high’ method. Before we delve into the actual techniques, allow me to share essential tips to take note of:
- Prepare emergency fund (six months' worth of income)
- Get a small gold bar of 100g
- Allocate the funds into three parts
- Learn how to analyse gold price charts
- Begin with a small budget
Emergency Fund
The proper financial discipline in any form of investment is to allocate an emergency fund of about six months worth of income. This is extremely important so that we would not make any emotional decisions when the gold price takes an unexpected turn. If something were to happen to our primary income, we would not be too worried as we can still go on with our life using this fund.
We will be more relaxed when we choose to invest using additional funds. If the gold price crashes unexpectedly, we would not be in a position to sell the gold as we have a separate allocation for our emergency uses. In this situation, our thought process would be more rational, and it would be easy to make decisions.
For those who do not have an emergency fund of six months' worth of income, I highly recommend buying gold for savings first. Once this portion of allocation is ready, it is suitable to pay more attention to gold investment.
Having a 100-gram gold bar
If we begin investing with one gram or one dinar, the return would not be meaningful and worth the effort. Even if the gold price skyrockets, the absolute profit would be minor, let alone make us rich.
Hence, if the idea is to invest for trading, the minimum amount that justifies the effort is a 100g gold bar. The following are the reasons why:
- Has a tiny spread margin (difference between buying and selling)
The profit potential will be more significant when the gold price skyrockets
- The profit is more meaningful (worth the effort)
If the gold price appreciates by five per cent (after adjusting for spread margin), the potential profit could be approximately RM1000. One gram would give only RM10 gain, making the effort a no-go.
- Entitled to rebates when becoming a gold business agent
Certain gold companies provide opportunities to become gold agents, and through this mechanism, the profit potential would be much higher considering the rebates offered by the company (for buying or selling)
Allocate funds accordingly
We ought to be aware that gold prices do not go up in one straight line. There are times where the gold price would ‘retrace’ before going to higher price points. Hence, allocating the funds into three equal portions would be ideal for taking advantage of the volatility of the gold price.
The first purchase can be made with 30% of funds and continue price monitoring. The remaining 70% of funds can be kept as cash (in the bank) or cash equivalent tools (such as bonds). If the gold price appreciates, we then stick to the plan and sell this portion once it hits our target price.
However, if gold prices continue to drop, we utilize the second 30% portion. Through this process, we are averaging down our purchase price.
How if the price continues to drop?
Yes, you got that right!
We then utilise the remaining 40% and convert them into gold.
Typically, the gold price moves up to three levels, either when it goes up or when it comes down. That is the basis of having our funds into three separate portions. We could at least take advantage of the price movement. If we utilise the whole 100% at first instance, we might lose the opportunity to average our purchase price. And we might need to wait for much longer before we can sell for profit. Nobody likes that, right?
Learning to analyse price chart
The most critical component or toolset that they must know for gold traders is the ability to analyse price charts. This method is known as ‘technical analysis’, and with this, the ability to navigate the price charts after taking into account economic news would help traders make informed decisions.
However, numerous traders jump on the bandwagon and buy gold without having this crucial skill set. This is indeed a mistake. Without applying this skill set, they always appear anxious when looking at the gold price.
When the price appreciates, they feel anxious and unhappy. When the gold price drops again, they feel the same. If this is how they respond, that is no longer investing, in my opinion. Instead, it is more towards ‘gambling’ or ‘betting’ using gold price.
In 2011, the world gold price saw its peak at USD$ 1788.50 per ounce. Those who bought at that price would regret it when the price began to drop in subsequent years. They might even decide to stop buying since they were technically ‘losing.’ Around 2014 - 2015, the gold price was at its bottom, and the best thing they could have done was to buy even more gold. By doing so, the average purchase price would have been brought lower. Those who understand the concept would utilise this opportunity to their advantage. Their gold amount would be higher than before while lowering the purchase price. Sooner or later, the gold price would appreciate, and the profit potential would eventually be realized.
Those who chose to do nothing would argue that since the first purchase has yet to profit, adding more gold is not worth it anymore. Then they go around telling gold investment is not profitable or is a losing opportunity. Therefore, it is not a question of gold price but how knowledgeable we are on that topic (in this case, gold).
Start with a small budget
After understanding the critical concepts of gold savings, begin with a small bar to get a flavour of the system and consider it a learning experience. Please be reminded that the decision to consider starting must begin after acquiring basic knowledge, and waiting to know everything before starting is not helpful, either. This explains why starting small, such as a 10g gold bar, would be a learning opportunity. After making the purchase, we learn faster than others who wait for the best price, best time, etc.
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Your buddy on gold investing,
Naresh G