CORPORATE APARTMENT, BALTIMORE – Last week I shared with you that I’d bought some call options on gold. Since then, some of you sent me letters asking me to reveal exactly how I did it. Here’s the thing…

I do not recommend buying call options on gold. I think it’s a terrible idea for most people, and I only did it for a bit of fun and to express how excited I am about gold’s prospects.

Most likely, I will lose 100% of my money, which I’m okay with because I only risked a (very) small amount of money… and, to be perfectly honest, I’m satisfying my urge to gamble.

I wouldn’t tell my family to buy call options on gold. And I’m certainly not going to recommend you buy them.

But there are great ways to make money from gold’s rise that don’t involve call options. More below…

Dusty and Miles’ New Hobby

Greetings from Baltimore. My family and I have been staying indoors. We play games, read, listen to music, and eat together.

Here’s a picture of my sons and me reading on the sofa today…

PhotoReading with Dusty (left) and Miles (middle)

I’m so proud my sons have discovered books. This is a new thing.

On our trip they listened to dozens of books through earphones. And they read a few books on our devices.

But when we were in London last month, we were staying near a public library. The kids read books – I mean real books that don’t have pictures and have more than 100 pages – on their own for the first time.

Here in Baltimore we live near the Enoch Pratt Library, and now they’re reading even more…

Not Making the Same Mistake Again

What’s the best way to buy gold?

When gold’s rise begins to accelerate, it’s going to be really HARD for me to hang onto my gold investments. I know this from experience.

I invested my entire life savings into gold futures in 2002 and 2003. I even persuaded some friends to give me money, and I invested their money into gold futures, too.

I was right about gold. Over the next eight years or so, it rose from $350 to $1,900. But I got scared and sold all our gold futures before gold had reached $500.

Then I had to watch the market rise year after year, knowing if I’d just held on, I’d have made hundreds of thousands of dollars.

The same thing happened with bitcoin nearly 10 years later. I found bitcoin when it was trading at $4 a bitcoin. I knew it was going to rise, so I bought 3,330 of them.

I was right. Over the next five years, bitcoin rose from $4 to $20,000. But I got scared and sold all my bitcoin for less than $350. Then I had to watch the market rise year after year, knowing if I’d only held on, I’d have made tens of millions of dollars.

The lesson I learned is, once a bull market gets going, it’s deceptively difficult to stay invested and deceptively easy to get pushed out of the elevator.

A bull market just got going in gold. Once again, I’ve gone “all in.” Except this time, I’m not going to make the mistake of selling too soon…

How? By making it as easy as possible for myself to stay invested.

Know Your Weaknesses

Some gold investments are easier than others to hold on to.

I found gold futures, for example, difficult to hold onto. They’re volatile, they tugged on my heart strings every minute I held them, and I could sell them with one click of the mouse on my laptop. I ended up stepping off the elevator far too early.

Physical gold, on the other hand, I find very easy to hold on to.

I can bury it and forget about it. Or lock it up in a bank vault. And if I want to sell it, I have to take it to a dealer (or pack it in a box and ship it to one) which means it’s much less likely I’ll make an impulsive decision to sell.

Gold stocks and ETFs fall somewhere along the spectrum. They’re more volatile and easier to sell than physical gold, but they’re not as wild as derivatives like futures or options. 

Now I know my vulnerabilities. And this is why I’ve made physical gold the foundation of my “Big Trade.” That trade is the bet I’ve made on the Dow-to-Gold ratio falling below 5 – which I expect will happen in the next five to 10 years.

(I broke down the different parts of this Big Trade – and what the Dow-to-Gold ratio is – here.) 

I also own some gold and silver ETFs and stocks, but it’s a much smaller position than my physical gold. And finally, I own a micro-position in call options, which as I said above, is just a token position and not something I take seriously.

Tomorrow I’ll tell you about the different decisions I made within each section of my pyramid, starting with the types of gold coins I bought. 

I spent A LOT of money to learn this lesson. I hope you benefit from my experience… and don’t make the same mistake.

– Tom Dyson

P.S. The Dow-to-Gold ratio is at 18.

Like what you’re reading? Send your thoughts to [email protected].

FROM THE MAILBAG

Tom answers your questions about gold and 401(k)s… how a move to cryptos might affect the Dow-to-Gold ratio… and the real reason so many pre-1933 gold coins survived – despite a government ban…

Reader comment: I am very glad that you and your family got out of China before the coronavirus started to spread. Yeah, I know it is not as lethal as MERS or SARS, but still, it is always better not getting exposed to it than to fight it off.

Anyway, keep sharing your ideas on gold investing. Your call option sounded very interesting, for instance. Also, your suggestion that people live off selling bits of gold till gold surges made a lot of us ponder and look into our complicated stock portfolios.

Reader question: I love reading your postcards. I’m so happy you and your family are happy. I have a question… If my 401(k) is connected to stocks and mutual funds, then do you recommend also buying physical gold? Thank you for all you do.

Tom’s response: I also have a 401(k) connected to a stock broker. So I used the savings I had in the bank to buy gold coins. Then I used the money in my 401(k) to buy silver and gold equities and ETFs.

Reader question: I have a company 401(k) that I’ve managed to load up with gold and silver stocks, yet the best advice I hear is to sell all stocks and get into physical gold. I still think that is great advice, but I think my hands are tied until I retire in December and can access the account.

Does your present advice mean sell all stocks and go to cash? Because my 401(k) doesn’t allow for physical gold.

Tom’s response: I also hold gold investments in a 401(k). I’ll keep them there until the Dow-to-Gold ratio hits 5.

Reader question: What is your take on the possibility of a move to cryptos instead of gold? I’m sure there will be a flight to gold but some (or quite a bit) could also go to cryptos, which may affect your Dow-to-Gold ratio.

Tom’s response: As I explained here, I think cryptos are in a bear market and their significance will wane over the coming years. Gold is in a bull market and its significance will increase.

Reader question: You never responded to my question about gold coins when you were still in China, so I will pose it again.

In 1933 they made it a crime not to turn in your gold coins, so how come there are still so many of the pre-1933 gold coins? Go to any coin show, and you’ll see thousands for sale and trade…

Tom’s response: There are two reasons so many pre-1933 coins survived. First, many people simply broke the law and refused to hand them in. Many people became collectors, too, as collections were legally exempted. Second, many of the coins had gone overseas. Foreigners were not compelled to turn their coins in.

Reader comment: You have a fresh way of approaching the readers, raising the importance of having physical gold. You offer solutions to people. This is immensely important!

I think your 100% in gold is dangerous. You are definitely not preaching the golden rule of diversification. But it’s fine! As long as you offer solutions to people, that is what we are looking for – answers, not complaints. 

Reader comment: Thank you for your work. Enjoy Baltimore. As a parent who has been homeschooling my own kids and has relocated frequently (not to the point of being a nomad family, though) for much of my kids’ lives, I wish you and your family the very best and good health.

Tom’s note: Thanks for writing in! Please keep sending your questions and comments to us at [email protected]. Like I wrote in Friday’s Postcard, your messages are an integral part of this project.