If you have been paying attention to the gold market recently, you know that the gold price is in record territory.  But is buying gold now a good idea or not?  Buying gold at $1045 an ounce is a great idea if the price is $2000 an ounce in a year or two.  On the other hand, if the price goes to $500, you shouldn’t buy it.  If I knew what the gold price was going to be in two years, I wouldn’t be writing about it.  I would be sitting on an island in the Caribbean right now.  But that doesn’t help you, either, now does it?  Even though it is impossible to know what the price of gold will be going forward, there are some principles that we can use to invest in gold even at record prices and not lose a fortune.

The first thing you need to do is acknowledge the fact that despite all the research and analysis you do, at the end of the day, the price of an investment may not perform the way you think it ought to.  That should be the take home message of this article.  With that in mind, is there a way to invest so that you don’t lose a lot if you are wrong?  Yes, there is. 

To do this, let’s take a lesson from Jesse Livermore, one of the greatest market speculators in history.  He always knew that there was no arguing with the market.  Whether or not the price was rational or what you thought it should be, the fact was that price is determined only by the market.  As a result, he would institute the use of what he called “probes” and trading from a position of profit.

Using gold as our example, let’s say that you want to expose a total of $10,000 of your portfolio to gold.  Rather than invest all at one time, you send out a “probe” of $2,000.  This could be in physical gold or more realistically the gold ETF (symbol: GLD).  You would watch the investment to see what happens.  If it started to decline, you could sell when it had lost 10% of its value.  Instead of losing 10% of your entire investment allocation, you only lose 2% of your entire capital.  You were wrong about the timing of your investment.  Oh well.

If the price of gold starts to increase, however, and goes up by 5-10%, you can invest the next $2,000 probe.  You are now trading from a position of profit since your overall average cost has been lowered by the initial, lower investment.  If the price turns and starts to decline, you can sell without losing much.  If it keeps increasing, keep adding to your position.  Your original purchase will keep adding to its profit.  By using this technique of dividing your investment into allocations and “probing” the market, you can invest with confidence even at record highs.

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