Would it be wise to take a loan at a bank to invest in gold and silver (physical bullion & selected stocks), given that the bank rates are so low and the prices for gold and silver are still in the 2nd phase range of the commodities' bull market?
We must admit that the idea is tempting, but we generally do not recommend it. While it does seem to make sense, as far as the pure logic is concerned, one should also take other factors into consideration, and we believe emotions would be the thing that we need to focus here.
By borrowing money and investing it in an asset that does not provide you income, i.e. dividend, you also generate a negative revenue stream. In other words, you need to make payments on a monthly basis, which is not a big deal as long as the price of gold goes up, but which may become a big problem during consolidations. The point here is that when you have to pay for the ability to hold a certain amount of gold or silver, you would like metals to go to the moon instantly. Naturally, all owners of precious metals (including your Editor) would like to see the price of metals explode but with leveraged positions (and buying gold on margin / for borrowed money, means increasing the leverage), the pressure is much greater.
During consolidations, when we need to wait a little longer, it is easy to get irritated just because prices don’t go where one wants them to go; however, if you need to pay along with watching your holdings go lower in value, you are much more likely to close your positions just to stop “losing” your money. I’ve put “losing” in quotation marks, as consolidations are only a temporary phenomenon, needed in every bull market, but with the big pressure involved in buying anything on margin, it is very easy to lose one’s focus and close one’s positions much too early, possibly with gold at lower prices than it was when one made their purchase.
Therefore, taking the realistic approach toward investing, we cannot recommend purchasing gold and silver with borrowed money for most investors. Yes, it might prove worthwhile for extremely discipline and risk-loving Investors, but we believe that for most people, this approach is dangerous. Of course, the final choice is always up to you, and we’re fine with whatever decision you take. If you decide to proceed with purchasing gold and silver with borrowed money, be sure to take the abovementioned factors into account.
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