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When I moved to Perth from Sydney to take up the job of Depository
Administrator I thought the best way to get up to speed quickly would be to
go through each client file (we are talking good old paper here). This way I
could see first hand how transactions were done,
how I should word correspondence, etc. As I worked my way through the files,
I started to see a pattern – the client would open the account,
purchase a large amount of gold and then, nothing. No further contact, no
further purchases or sales, no enquiries as to the price of gold, nothing.
Initially this puzzled me, I mean if you had a substantial investment,
wouldn’t you be constantly reviewing your portfolio allocation and
making adjustment accordingly? The behaviour seemed
very odd, very un-investment like, especially for such obviously wealth
persons. In a lot of a cases we were talking about periods of 5-10 years
without any trading or contact.
As I got to trading and talking to a wide variety of the Depository clients,
I came to understand that there were a lot of different reasons for buying
gold. Associated with each reason was usually a timeframe, and by that I mean
how long they expected to be invested in gold before selling out - hopefully
at a profit. I ended up classifying them into three groups: short, medium and
long term timeframes. The “no further contact” clients were in
the long-term group, and specifically what I call insurers.
Now my definition of what those timeframes were may not accord with their
definition as used in other markets or yours, but it does fit what I saw when
analysing the transaction behaviour
of the Perth Mint's Depository clients (and I did a fair bit of analysis,
partly because I am a numbers person and partly because I was always looking
to understand gold buyers).
Long Term
By long term I mean timeframes that are measured in years, indeed in some
cases we are talking decades. This group can also be broken down into two sub
groups - strategists and insurers. Common to both is the fact that they have
a very strong, if not emotional, attitude towards gold. These are your
classic buy-and-hold investor. Their view is historic and economic, broad
brush. Their investment is more about wealth preservation than wealth
generation.
The main difference between the strategic sub-group and the insurance is that
the strategic do have an end game where they will get out of gold at a profit
once the economic cycle has shifted back towards conventional investment
classes like stocks. They are in for the long haul, but only because they see
an extended period of poor returns but do generally prefer wealth creating
assets. They may also hold a small permanent position in gold (say less than
1-2% of wealth) and are just upping the allocation to precious metals as a
defensive measure for a period of time and then back down to a relatively low
level.
The insurance sub-group on the other hand have no end game in sight, they
hold a core position in gold that, once established, is rarely added to. They
don’t care about the price and profit is not the focus. They are using
gold as insurance, insurance against events that you cannot get insurance for
– major depression, civil war, world war, societal breakdown, currency
collapse. There are invariably very large amounts involved. These are people
who have enough money that they can park some “lazy” capital into
gold, enough that they can reestablish themselves with should the unthinkable
occur.
Why I was initially puzzled by these clients was because I assumed that you
bought gold as an investment, but the motivations of insurance are different.
The way I like to think about this reason for buying gold is if you buy car
insurance and then at the end of the year you have not had an accident, you
don’t say to yourself “well that was a waste of money, I paid the
premium and never got to claim on the insurance policy”. Instead you
say “great, I didn’t have an accident, how lucky” and you
write-off the premium. This is the same attitude these clients have towards
gold – if the price goes down, they don’t moan about the money
lost, they consider themselves lucky that there was no economic breakdown.
They don’t want to make a lot of money out of gold, because in their
view this means that they have lost all their other investments.
Medium Term
Medium termers, or tacticians, talk in timeframes of months, usually 6 months
to less than 2 years. A lot of times they end up in gold for longer than
that, usually because their assessment was out or they want to ride a trend a
little bit longer, but in mindset they are generally not long termers. The
motivation here is purely profit, the analysis behind their position is
usually economic/currency valuation based.
Sometimes there is a blurring between medium and long temers,
with some holding a strategic view on gold and so they plan on being invested
in gold but cannot resist the opportunity to sell out at peaks and buy back
in on corrections as they ride the bull market. They are definitely not
buy-and-hold type investors.
I would also put into this category non-goldbugs
who are just hitching on the “commodities story” and think the
bull market in gold will run for a few years at most and that they will get
out at the top (or near to it) in time, ready to deploy their profits into
the next investment fad.
Short Term
Short termers have timeframes counted in days or weeks. Speculation is
another word for it. My definition of 6 months or less is probably debateable and could be shorter. In any case, quick
profit is the goal and there is no philosophical belief in gold.
Unlike the medium and long termers, this approach is one that I do not
recommend, because I have seen few, if any, who have been able to do it. Why
that is the case has little to do with the investor’s competency
(although I have seen some who did lack any trading acumen) and more to do
with the nature of the gold market itself.
Anyway, that for next week’s blog …
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint as an Administration
Officer in their Sydney retail outlet. In 1998 he moved to Perth to work in
the then fledgling Depository division. He has held a number of roles since then
in the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth Mint in any way.
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