Investing in Gold & Silver For Dummies. Paul Mladjenovic

metals futures and options could have very wide and scary price swings. That is the nature of the market.

      

In fact, it isn’t uncommon for precious metals to “correct” by 20 to30 percent or even more at least once a year (I’ve come to learn that a “correction” seems awfully incorrect at the time). The terms correct or correction mean that a market came back down after going up too far and/or too fast. Don’t confuse a market “correcting” with a market experiencing a bear market — a long-term falling or decreasing market. The correction is a temporary pullback in the price of the asset that is in a long-term bull market, or rising market. In other words, the difference between a correction and a bear market is the same difference as fainting and dropping dead. In the former, you recover and get back on track. The point is that gaining knowledge about your market helps you understand moments such as the difference between a correction and a bear market.

      Being disciplined

      When markets go up and down, it can be difficult to stay disciplined. Markets can’t be controlled by individual investors, but they can and should exercise self-control. People can let their emotions overrule their thinking and do the wrong things when they ought to do the opposite. It happens especially in fast-moving markets.

      My client (I’ll call him Bob) had put $2,000 in a commodities brokerage account. Under my guidance, he purchased some options (see Chapter 13) on silver futures. Within a few weeks, the value shrank to $900. Imagine that: He was down 55 percent. Of course, he was very concerned (wouldn’t you be?), and we discussed the situation. I told him to stay the course because my research told me that the underlying asset (silver) was in a bull market and that this price drop was a temporary condition. In addition, the options that he purchased had two full years to go before they expired. This is an example of what happens in the marketplace; no matter how solid your research and logic, the market can go against you. If your research and logic were sound, then the odds would swing back in your favor in due course. He decided not to panic and stay the course.

      For Bob, the discipline paid off. The $2,000 he speculated with became $4,000 a few months later as the silver market rebounded. Those options were finally cashed in for $5,000 about 12 months after the initial purchase for a gain of 150 percent. To this day, the account is still growing because we stayed disciplined and bought (and cashed in) at points that made sense. Bob could have panicked when it was at $900, cashed out, and jumped out the nearest window, but thankfully he stayed disciplined and reaped some excellent profits.

      

When you are in fast-moving markets, have a plan in place regarding how much you will put at risk, when you plan to get in, and under what conditions and price points you’ll take profits (or losses). Chapter 14 has some strategies to help you.

      Having patience

      Everyone wants to get rich quick. Who wouldn’t like to make a fast buck? Well, people that reach for the fast gains end up with fast losses. But if they invested in quality assets (stocks of solid, profitable companies, for example), the gains can materialize over a longer period of time. Had you bought quality stocks just before the crash of 2008 or, more recently, the ugly crash during the pandemic crisis of spring 2020, your positions looked ugly in the short term. But in due course, if you chose wisely, those stocks would have risen, and you’d see the hoped-for gains.

In a nutshell, I think impatience has been the greatest “personal” problem among investors in this decade. I’m not just saying this for long-term investors; it also goes for traders and speculators. Very often, that investment or speculative position you underwent may go down or sideways for what seems like forever. Sooner or later, if you chose wisely, others notice it, too, and the payoff can then be swift and impressive. Flip to Chapter 14 for tactics to help you in the short and long term.

      Using diversification

      The advice to use diversification is probably the oldest investment advice (right after “don’t loan money to your relatives”). Diversification in precious metals can mean several things. It could mean spacing out your money among different metals (some precious metals and some base metals). It could mean spreading your money among different classes of investment vehicles (a mix of gold and silver mining stocks along with a precious metals mutual fund). For speculators, it may mean deploying strategies that could benefit in up or down markets (such as using an option combination like the long straddle; see Chapter 13).

      You can even diversify when you’re speculating on a single vehicle. In 2019, most of my clients with commodities accounts were overwhelmingly in silver futures options. It is indeed a high-risk approach, but it paid off very well. Silver that year ended up 45 percent, and most of the silver futures options were up in triple digit percentages (sweet!). But where possible, the options strategies involved a diversified mix of strike prices, time frames, and some hedging. All hedging means is that you do something in the account that could do well if the market goes against you. Hedging is covered in greater detail in Chapter 14.

      Since this book covers the world of precious metals, I can cover diversification in this area, but it’s important to understand that this singular area should be only a single slice of your total financial picture. You need to address other areas of your situation such as

       Money in savings

       Reducing and managing liabilities (such as debt and taxes)

       Money in conventional investments such as stocks and bonds

       Real estate and other tangible assets

       Insurance and other risk management tools and strategies

       Pension matters and retirement security

It’s not a complete list, but it’s important to point out that whatever you do in precious metals, it doesn’t happen in a vacuum. Hopefully you’ve looked at your entire financial picture and the economic/political landscape and you’ve discovered that the best way to protect and grow your wealth in these times is by diversifying into precious metals!

      

Diversification can be accomplished in two ways:

       You can add precious metals into your portfolio to gain benefits that may not be there with other, more traditional investments

       You can be diversified inside the precious metals portion of your portfolio by having both physical metal (such as gold and/or silver bullion coins; see Chapter 9) and paper investments (such as mining stocks and precious metals exchange-traded funds [ETFs], covered in Chapters 7 and 8, respectively).

      Keeping some risk management tools in your arsenal

      

Risk isn’t like the weather (“Everyone talks about it, but nobody does anything about it!”). It’s something that you can manage and profit from. Here are some proven strategies: