Trading gold is an age-old hedge against inflation, but in uncertain times some people are turning to trading gold as an extra revenue stream. Paul Harrison quizzed Nik Kalsi and Phil Carr of The Gold & Silver Club to get their top three tips on the process…

“Plan your trade and trade your plan”

‘Trading blind’ (buying on a whim) is senseless. In fact it’s not trading, it’s gambling. You need a plan. Before you place a trade you must know the exact setup conditions of the strategy you will be using along with the exact entry and exit criteria. Once you have a plan, stick to it and don’t deviate from it. This requires discipline. If you can do this, you instantly increase your chances of success. An example of a plan is to have a proven successful strategy that you commit to trading on a consistent basis, taking every buy or sell signal as they occur and compounding your returns on every trade.

“The trend is your friend”

This simply means you should trade with the trend of the market, embracing it to trade in the safer and more profitable direction. Prices are more likely to continue in that same direction than reverse. Hence you have a better chance of making money because about 75% of the time the market will continue to go in the direction of the major trend, gold being a very good example.

“Buying is all about timing”

Gold has been in an 11-year bull market but it’s important to be able to buy in at the best possible price. An example of this is when the market ‘corrects’ or ‘sells off’ to a degree. When looking at the chart, you would see a pullback from its strong upwards movement giving you a great entry price. Over the last year, three significant pullbacks were in May 2011, Sept 2011 and Dec 2011, all offering great entry points to profit from.

Q1: How much gold are you allowed to buy as an individual? Do you physically own it or is it all through a broker?

Nik Kalsi:

As an individual investor the amount of gold you can own is currently unlimited, however you will be capped on how much gold you can buy in a single transaction. Each country has different laws on this. Currently there are restrictions on importing or exporting more than €10,000 of gold from the EU in one transaction. Always check the HM Revenue and Customs website if your intention is to travel with gold purchased from abroad.

Q2: I get the impression gold does not fluctuate hugely. Is making money from these fluctuations about watching the news and learning what types of events change the price? Give me a couple of examples of factors that might change the price?

Phil Carr:

In the last year gold has become more volatile. The typical daily price fluctuation now ranges from $20 – $100 in one day which is great for trading. Examples of significant news that affects the Gold price is when Ben Bernake Charmain of the Federal Reserve speaks especially when there is talk of additional quantitative easing (money printing). We also see sharp spikes in price around Non Farm Payroll (first Friday of every month at 1.30pm GMT) and when the European Central Bank announces additional monetary stimulus causing the price of Gold to spike.

Q3: What’s the greatest risk of buying gold?

Phil Carr:

The biggest risk associated with gold is the possibility of gold possession being outlawed again as was the case in 1933 under the Gold Confiscation Act in USA when the hoarding of gold coin and bullion was forbidden. The chance of this happening again is remote, however history often repeats itself, so for this reason it would be advisable not to have your gold stored in the US but instead have it stored offshore. The most sought after locations are the Jersey islands and Switzerland where you’ll find many gold brokers in Europe keep their vaults.

If you would like any more information about gold trading or have any questions, please email: Phil@thegoldandsilverclub.com or visit directly www.thegoldandsilverclub.com

Back in 2004, James Turk in his book “The Coming Collapse of the Dollar and How to Profit from It” predicted that gold prices will go up to $8,000 an ounce, when they were trading at $ 440 an ounce. He still holds his view and believes that even at current prices ($1,722 an ounce) gold holds good value. In an interview to Jitendra Kumar Gupta, Turk also talks about the global economic crisis and why he thinks silver is a better bet. Turk is chairman of Goldmoney, which provides a platform to purchase precious metals. It safeguards precious metals worth $2.04 billion and almost 19.6 tonne of gold.

Why would gold prices go even higher from current levels?
Our longer term forecast for the price of the gold is $8,000 a

n ounce sometime between 2013-2015. The reason is central banks’ action of debasing currencies. Historically, before the Gold Standard, the Fear Index (a term coined by Turk), which is nothing but how much worth of gold is sitting in the US treasury’s vault for every dollar circulated in the system, was usually 40 per cent. The fact that it is now only 3 per cent means that gold prices should go much, much higher.

What is the rationale behind your prediction of a dollar collapse?

The dollar is going to collapse unless they change policy. However I see no indication at Washington or any desire to change those policies. We know from monetary history that a government spending and borrowing too much will ultimately destroy its currency through hyperinflation. As a result there could be a collapse of currency or collapse of the economy which is where the US is headed. In this scenario, gold is very much an under-valued asset.

Like in 1933 in the US, is there a risk that at $8,000 an ounce that governments might confiscate gold and how do you protect your investment?

That is true, it is a risk. Gold has been confiscated even after 1933 in other countries. Since it has happened in the past one cannot rule out that probability. Possibly to mitigate that risk hold gold in different ways. In this case a geographic diversification could be a help.

What is the case for silver?
I am more bullish on silver than I am on gold. Right now the ratio (silver/gold) is 50 ounce of silver to an ounce of gold. Historically this ratio is about 1

6-17 ounce of silver to an ounce of gold. As the bull market in precious metals continues in the future I expect this ratio to fall meaning that silver will outperform gold. But silver comes with a lot of volatility. Silver is an industrial commodity but also a substitute to gold. Silver has a long history of being used as money. At current levels, silver is trading at very good value.

Is it just the US economy that gives strength to you argument in favour of gold?

It is not just the US but the whole world. The reason why the whole world is in a mess is that central banks have been following loose monetary policies and borrowing excessively. Governments have been spending more than they can earn and borrowing to meet their operating expenses rather than investing. Ultimately that system is going to come to a conclusion and that’s what I think we are facing now. There aren’t enough jobs being created around the world to service all the debt, particularly government debt, which has become huge. I should say not only in the US but countries like UK and even to the some extent the Asian countries are affected by the huge government debt.

What about the fallout?
It is hard to predict the future. We have never been in a situation like this before where the world’s reserve currency is backed by nothing except the promises of the politicians. What hyperinflation can do is evident from situations that unfolded in Zimbabwe, Soviet Union in 1993 and Argentina in 1991. But this is the first time that the world’s reserve currency is on the verge of hyperinflation. The reason is they are borrowing and spending too much. They will call it as quantitative easing but in reality it is printing of money.

Problems in the western world are described as kicking the can down the street. When will this reach a conclusion?
Yes they are kicking the can but that can is no longer a can but a two-tonne bottle. They cannot kick it any further because the markets have reacted; they are reaching a stage where governments are forced to solve their monetary problems. One can see the warning sign; the prices of gold in the last three years have almost doubled. This is a clear indication that the markets are looking for a safety and exiting the dollar because of which the commodities, especially gold is benefitting.

But is there an end to the printing of money?
Eventually there will be a point where the confidence in currencies will be completely shattered. When this happens it is usually six months before you get to further collapse in the currency. Recently, back in August during the discussion and debate about increasing the US debt limit, there was a danger of reaching that point. Presently in Europe we have seen the problems with the sovereign debt and banking system. Last week we have almost reached that specific point again, but then the central banks stepped in order to fund a big French bank that was near collapse. So we are very close, however that specific point could come next month, it could come next year or it could come after three years. We just do not know. What we do know is that governments around the world with their loose monetary policies, huge borrowing and spending requirements are heading for the cliff and sooner or later they are going to go over that cliff. I think we know that the crisis is brewing like the central banks’ action last week.

We know what is happening in the swap rate and interest rates and most importantly what is happening to the prices of gold.

So there is no time frame to predict?
They are buying time by making all kind of promises. In Europe, what they are talking about is making changes to the EU treaty. But again it is almost just propaganda. Even if they can do it, it is going to be far too late. And why the US and Europe, look at UK or Japan. And probably the next crisis is going to be bigger than the crisis of 2008-09. Because, during the last crisis they did not solve the problem all they did is just bought more time by bringing more debt to the system.

Can liquidity help banks?
Remember, besides liquidity you also have to focus on solvency. What they have done in the case of a French bank, which was near collapse, is to make it liquid but they did not make it solvent. These banks have so many bad assets on their balance sheet, which if marked at the current market price will wipe out their capital. I do not know how much time they can buy, but the reality is there is not much time left.

How do we protect ourselves?
In this environment, you can protect yourself by buying physical gold.

During a financial collapse, financial assets have counter party risk and they tend to go down in value, which is why one should avoid financial assets and try to invest in tangible assets like gold and others such as farm land, mines and so on.

Should an Indian investor worry about what is going on in the rest of the world?
Look at the balance sheet of the Reserve Bank of India. The reserves supporting the rupee is mainly dollar. And if the dollar goes down what will be backing the rupee? Nothing. So the rupee, which has already depreciated will go down further. That apart if the global economy slows down, which is what we are currently experiencing, that will have its impact throughout the world including India.

Do you think the recent rally in the equity markets and commodities is sustainable in the near term? It is a rally due to an increased supply of liquidity. It is not a rally that has come due to the solving of the underlying problems of sovereign debt and insolvent banks. I think we are going to see more bank failures and we are going to see more Lehman Brothers type collapses.

One problem a lot of newbie traders face is after very profitable trades they become over confident and start to take BIG risks, falling into a BOOM / BUST scenario where one month they are up, the following month they are down. The subsequent loses after a great run then cause the novice trader try to play catch up trying to make their losses back fast; both actions are the easiest way to loose your trading capital.

Many trading books have been written about this and discuss Money Management with complicated formulas. The key is really that no one trade should ever cause you so much damage that it significant effects you financially or emotionally . Irrespective of how sure you are that XYZ trade is going to rocket in your direction, only a percentage of your trading bank should ever be risked per trade. Infact the most likely way to be knocked out of the game permanently is a conviction trade. This is  where a traders conviction or ego is so strong that they bet far too much. So in conclusion, never get too attached to any single trade you make, remain humble, assuming each and every call an identical weighting. This way you will stay in the game.

One of the most identifiable trends around Gold is how its viewed differently by the East and West. In the West (including UK and USA) Gold is very much seen as speculation and a safe haven against times of economic crisis and uncertainty with many taking the view that Gold is in a bubble.

However in stark contrast to the West, India and China are the biggest buyers of Gold and have been investing in it for years, in these countries Gold is seen as a preservation of wealth, status and security against adversity. Infact it’s still given as a gift during weddings, birthdays and festivals and more recently we had the Gold Festival take place in India, during this time the consumption of Gold increases by 25% due to Eid, Dewali and the traditional wedding session.

People instinctively know Gold is really money, here is a great example for you.  If you were to give a child the option of 2 treasure chests, one full of paper currency and another full of Gold coins, which do you think the child would pick? You’ve got it, children always pick the treasure chest full of Gold. We instinctively know that Gold has value, its been used as a store of wealth for over 5000 years. Infact 5000 years ago an ounce of Gold would buy you a suit of clothing, 1000 years ago an ounce of Gold would buy you a suit of clothing…. and today, you’ve guessed it, with Gold trading at $1790, an ounce of Gold still buys you a suit of clothing.

Gold provides wealth protection because it maintains its purchasing power better than paper currencies (also known as fiat). Research shows throughout history, every paper currency ever printed has eventually lost purchasing power against gold. No fiat currency detached from gold has succeeded as a stable store of value, and yet no gold backed currency has ever failed. At present the world’s major currencies are headed along a well-trodden path to loss of purchasing power. Widely available facts shows the Japanese yen, the British pound, the euro and the US and Canadian dollars have lost over 70 percent of their purchasing power against gold in the past 10 years alone.

As we continue to head into further economic uncertainty and instability with increasing global debt and large-scale money printing by Central Banks, which causes the devaluation of currency – it is no surprise that people are realising that their money and savings are no longer giving them the financial security and returns they once did.

Therefore Gold is regarded as the better option for investors as it holds and grows its purchasing power. Gold has been used as money for 3000 years now and will always be accepted as a universal worldwide currency. For hundreds of century’s investors, industries, governments, banks and nations have had an appetite for Gold and I don’t see this demand ending anytime soon.