Wednesday, June 29, 2011

Jagerson and Hansen, All About Investing in Gold

The latest addition to McGraw-Hill’s “All About” series is All About Investing in Gold: The Easy Way to Get Started by John Jagerson and S. Wade Hansen, founders of the website Learning Markets. Earlier they wrote All About Forex Trading and Profiting with Forex.

The book is a bit of a jumble. There’s a lot of material in it aimed at a wide swath of investors and traders. It deals not only with topics specific to gold but with how to pick the right broker, technical analysis (with an emphasis on Fibonacci retracements, projections, and fans), and option strategies. Along the way there are useful pieces of information, some very useful indeed, but it’s left to the reader to sort things out. The reader who needs help avoiding a mail-order counterfeit gold scam is probably not the same person who is interested in the damage caused by contango in a futures-backed gold ETF.

The authors are active traders who were clearly chomping at the bit in the chapters that provide gold market background, identify the major players, and outline the fundamentals of the gold market. They wanted to get to the meat of the book: strategies for making money investing in or trading gold. Curiously enough, to my mind at least—and this cuts against “my” grain—these chapters (particularly the ones on the major players and the fundamentals) may be the most rewarding for the gold investor.

Although the authors believe that gold has a bright future, they acknowledge that over the very long term gold remains relatively flat. And yet this very ability to preserve value over the long haul and to reduce portfolio volatility makes gold a good asset for diversification purposes. For buy and hold investors the authors recommend allocating a “substantial” portion of the portfolio to ETFs such as GLD and GDXJ.

For long-term investors the authors also suggest the use of covered calls “to reduce volatility and increase profitability over the long term without significantly increasing risk” (p. 177) and protective puts “to reduce the risk of a significant drop in the price of gold.” (p. 181)

Active traders might consider trading the gold-to-silver ratio or using gold stocks and gold together. They could use the COT report as a trading tool. Or, if their accounts are large enough, they could sell naked puts or increase leverage with synthetic positions. The authors point out some of the substantial downsides of all these strategies.

Both gold and options are “hot” topics in the trading world, and novices are eager to sign on to both. It may be relatively easy to get started investing in gold products, but it is decidedly not easy to ratchet up profits using options. All About Investing in Gold should be read as a primer, not as a trading plan.

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