Several days ago, one of my group members seeing the Gold price was dropping texted me a question asking whether she should take profit after the gold price has been running up so fast in so short a period. If you are familiar with stock investing, you might have heard the idiom says, “what goes up must come down!”. Looking at the two years gold price chart, the run-up of gold prices recently was too fast and too steep (Chart A). It justified her anxiety.
The first question came to me was that what was the motivation behind the taking of profit for gold fund profit right now? Is it out of speculative motive, greed or fear?
Temptation of the Profit
For those of you who have invested into gold related fund since December 2018, you might have seen a handsome and attractive return by now. For example, I have shared with my investment Platinum Group that one of my funds invested since December 10th, 2019 has recorded a profit of 38.41% as of August 11th 2019. The profit in ringgit was RM 1,903.93.
Are you not tempted to take profit if you see this figure? What if gold prices dropped back, all this profit will be evaporated. This is where fear and greed come into play in our psychology of investment. Knowledge of what we are doing will be important to curb our fear and greed and even know how to guide us for further action.
Before we talk about our move to take the gold fund’s profit, we have to understand why gold prices ran up recently and why we invest in gold-related funds in the first place.
Gold was historically seen as a safe haven when stock markets are not doing well. The second reason why gold prices soar is because the US dollar devalued by the drop of bank’s interest rate. I have already shared about this observation in the article “Should We Buy Gold Related Funds Now?”, please read about it as an important background of this discussion.
We normally take profit for stock that rises too soon too fast. Because there are always unseen manipulating hands behind share performances. There is a big difference when it comes to investing in stock and mutual funds. That’s the main reason why I recommend investing through mutual fund, rather than stock directly. But you have to do it DIY, not entrusted to fund manager to do it for you.
Mutual Fund over Stock Invetment
For a single stock, manipulation by big players seen to be always unavoidable because of imperfect legality that supposed to protect individual investors, but it turned out to be preventing market manipulation from individual investors but permissive for institutional investment firms on the other side.
However, for the mutual fund, it feeds into a larger pool of shares in the stock market, then manipulation of fund prices is totally out of our concern. Fund prices are determined by the underlying average price of those shares (possibly around 40 to 50 shares) where the fund is investing. For example, gold-related funds invested into mostly gold, and a small portion of gold mining companies.
When global gold prices rise, our fund price rises altogether. Global gold prices rise due to various reason as mentioned in the previous article and above. However, it has to go along with the general economic sentiment as a whole in the entire world. As we have witnessed now, gold prices ran up was mainly due to the uncertainty of the global economy due to trade war and other unresolved global issues like Brexit etc.
Future Outlook of Gold Prices
As I have long been proposing that trade war between US and China is impossibly resolved in any way sooner or later, the global economy has been predicting slowing down by most analysts and powerful economic individuals like the IMF. Then gold will still have its shine shortly. Instead of taking profit right now, I would even recommend topping up some more, positioning ourselves to take advantage of the investment future. However, a word of caution would still be good to listen to.
There will be a possibility that gold prices will drop dead to test the faith of our economic conviction. Therefore, it is wise not to place our capital all at once to avoid unnecessary fear and losses. Always construct your investment portfolio with risk protection even when you take up gold-related funds as your strategic choice right now. For those of you who do not know how to construct your rick portfolio but understand Chinese lectures, you may consider taking up online financial training course. Alternatively, you can also read through all of the article here in this blog especially in the UT Investment Strategy section, you would possibly have an idea of how to construct a risk managed portfolio.
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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for an investment decision. Investors are advised to do further reading and research to conclude individual decisions.