Ten common mistakes people make when buying gold

Buying gold has long been touted as a terrific way to diversify your investment portfolio and protect yourself against downturns in global currency values and financial markets. At first glance, the process seems simple enough. You just find a couple of coins that look good, fork over your cash, and store your loot in a safe, right? Wrong. There's much more involved in gold investing than browsing through a coin catalog and picking out your favorites. Unfortunately a lot of people actually take that approach-and end up losing quite a bit of money while doing so. 

But you shouldn't let the fear of making mistakes prevent you from taking steps to solidify your financial standing. All you have to do is be aware of potential pitfalls so you can avoid them when the time comes to buy. Here are 10 of the most common mistakes to look out for prior to purchasing this precious metal. 

1. Lack of knowledge. There is no excuse for being uninformed. As long as you have access to the Internet, you should be able to find out all you need to know about the basic ins and outs of gold investing. You should start by reading a glossary of terms related to this activity before moving on to articles and other resources so you know exactly what the experts are talking about. 

2. Misunderstanding the value of gold. This mistake goes hand in hand with lack of knowledge. In order to invest wisely, you must understand how the metal-especially in coin form-derives its value based on things like history, scarcity, rarity, indestructibility, and global recognition as a desired commodity. 

3. Indecision about your investment amount. People who are new to buying gold frequently make the mistake of either ordering too much or too little of the metal. If you buy too much, it defeats the purpose of diversifying your portfolio. If you buy too little, you're not doing enough to protect your other assets. Most experts agree that your coin holdings should equal from 5 to 30 percent of the combined value of the stocks, bonds, and mutual funds in your portfolio. 

4. Expecting big short-term gains. Gold investing is not going to make you rich overnight, so if you're interested in short-term gains, you should check out other options. The point of putting your money into investment grade coins is to hold onto them for a long time while they appreciate in value. 

5. Linking gold markets to the stock market. Some would-be investors are under the mistaken impression that gold prices are somehow linked to the stock market, and that fluctuations in one will lead to corresponding reactions in the other. But it's important to understand that the two markets are largely independent of one another, so your purchasing decisions shouldn't be based on illusory cause-effect relationships. 

6. Substituting gold stock or ETFs for the physical metal. Buying gold to protect your assets against unstable market conditions, inflation, and other economic problems is a smart move-but only if you get the metal itself instead of stocks, exchange traded funds, or other unworthy substitutes. 

7. Skipping Rare Certified Gold in favor of bullion. Not all gold investments are created equal. Bullion, for example, will not appreciate in value based on age, rarity, or other variables. It will only be worth what the commodities market dictates. By contrast, Rare Certified Gold coins that are held for many years can end up being worth far more than what their weight would command on the commodities market, since their value is driven by supply and demand. 

8. Looking for cheap prices. Although getting a bargain is usually considered a good thing, that's not necessarily the case when it comes to buying gold. Abnormally cheap prices are typically an indication of inferior quality, and are therefore a clear sign to stay away-unless you don't mind getting stuck with something that you won't be able to resell when you need cash. 

9. Working with multiple dealers.Because of the large sums involved in gold investing, it would be worth the time and effort to seek out a reputable dealer and stick with that person for each transaction you make. You will get to know and trust each other a bit more after every deal, which will in turn pave the way for discounts on bulk purchases and similar goodwill gestures. 

10. Failure to understand premiums over spot. Buying gold coins always involves a dealer markup or premium. This is what you're expected to pay over the spot price, and varies from dealer to dealer. It's critical to have some knowledge of fair premiums over spot in order to be able to identify any good or bad deals that might come your way. 

In order to make sound decisions when buying gold, it is imperative that you first learn all you can about gold investing. There are lots of factors that impact each transaction, so the more you know, the better your chances of being successful. 
Courtesy : EzineArticles.com
http://www.commodityonline.com/news/Ten-common-mistakes-people-make-when-buying-gold-38734-3-1.html

How I lost money in commodity trading

In reaction to our earlier pieces on futures trading and commodities trading, Get Ahead reader Satish Vijaykumar tells us how he lost money when he dabbled in Commodity Futures.

The day the Sensex crossed 9000, I sold all my shares and decided to park my money elsewhere. I was faced with the perennial question that plagues investors: Where must I invest?

Equity mutual funds? They too would be dependent on the stock market performance.

Public Provident Fund? And block my money for 15 years? No way!

LIC [ Get Quote ] policies? Not too happening.

Real estate? Way above my budget.

Commodities trading? Ah ha, that sounded good.

With 80% of the Indian economy being agro-based, commodities trading has a lot of scope (at least, that's what I figured). In commodities trading, you actually trade in commodities (like gold, wheat, crude oil, etc, not stocks).

The success of companies like Financial Technologies (known for its trading software), and the amount of trading done on MCX (the Multi Commodity Exchange of India [ Images ]) and NCDEX (the National Commodity and Derivatives Exchange Ltd), left no doubt in my mind that this was a booming industry.

I wanted to be part of it.

I set the ball rolling

I decided to invest Rs 2,00,000 with a leading commodity trading firm in the hope of achieving returns in the 20% to 30% range by the end of the year.

A friend who works there gave me a tutorial and PDF files so I could learn and understand the business (read How to trade in Futures and How commodity trading works to grasp the basics).

There are two things you must know.

First of all, when you buy a Futures contract, you don't pay the entire value of the contract, just a margin.

Let's say someone is selling a Gold Futures contract of 100 grams of gold that is worth Rs 72,000. If I buy it, I will not have to pay the entire amount. The exchange will set a margin at, say, 3.5%. This means I pay just Rs 2,520 to buy it (3.5% of Rs 72,000).

Secondly, you make and lose money on a daily basis. Here's an example that assumes I have bought that Gold Futures contract:

Let's say the price of gold rises to Rs 73,000 per 100 grams the next day. I make Rs 1,000 (Rs 73,000 – Rs 72,000) and the amount is credited to my account.

The day after, the price of gold dips to Rs 72,500 per 100 gms. I lose Rs 500 (Rs 73,000 – Rs 72,500) and the amount is debited from my account.

I guess you must have got the hang of it by now.

After a week of poring over all the literature, I opened an account with the commodity broking firm. They would invest my money based on the decisions taken by their research team.

My adventure begins

The first few days, life was great. I was making money. I would make a minimum of Rs 500 to a maximum of Rs 2,000 every day. After that, Lady Luck's smile turned into a frown and the firm's research calls no longer hit the target.

My losses began to mount daily: Rs 2,000, Rs 3,000 and even Rs 5,000 in one day!

In 10 days, I had lost Rs 17,000. Can you blame me for getting jittery?

Reality hit me: I was in unchartered territory, clueless about the products I was trading in. I did not understand a thing the dealer said in her daily briefings. She gave me her usual spiel and egged me on, saying there would be losses initially but, in the end, everyone made money.

Momentarily relieved, I breathed a sigh of relief.

I was going by the logic: Be fearful when others are greedy and greedy when the rest are fearful.

That's when the bombshell fell. The very next day I had lost another Rs 17,000 by trading in gold.

That did it for me. It was time to get out. Fast!

After adding the brokerage and the taxes, I realised I had managed to lose Rs 47,000 in 15 days flat.

But, since I tend to look at the bright side, I have to admit the last few days were a great learning experience.

Am I feeling cheated or sad that I lost such a huge amount? Not really.

I guess I've reached the stage where feelings or emotions don't last too long. They just vaporise after a while (like the money I made and lost in day trading).

But hey, I am wiser. So let me share some pearls of wisdom with you.

Lessons learnt the hard way

~ Don't run after anything out of sheer greed.

~ Investing without sufficient knowledge or adequate research will hit you hard.

~ Never rely solely on the judgment or research of others. If it is your money, you take the call and do your own research.

~ Don't shy from asking questions and demanding more information. Remember, it is your money at stake.

~ Stick to investments you have some amount of knowledge like shares or real estate.

~ When in doubt, get out!

~ Tough times don't last (and neither do great profits), tough people do.

~ Day Trading (buying and selling in one single day) is a flawed method of trading.

~ Look at technical charts that track commodities over a three to six month period to get a more reliable indication as to where the market is headed.

~ Most important: learn from your mistakes.

http://www.rediff.com/getahead/2006/jan/20trade.htm