Strategy 5 of 5: Investing in Precious Resources

In my last blog, we discussed the concept of the Buffalo – taking advantage of sideways movements in stocks, both up and down. In this next article we will be discussing How to Beat the Crisis by investing in precious resources. We will find out how to making money when markets go down, or ‘selling short, in more detail.

Some people believe that we are out of the crisis, but logic states that if we have not cured the cause of it, then we will feel the effect of it again. I had the pleasure of speaking at an event in Malaysia with the eminent economist, Richard Duncan, who described the crisis like a person walking in narrow alley littered with tin cans, and kicking them down the alley. If we don’t clear them up now and continue to kick them down the alley, then pretty soon as we walk along we shouldn’t be too surprised to find a huge pile of tin cans further down the alley, too large too clear up. Three years ago he said we had about 3-5 years before the next Financial Crisis would hit again … and this time it would be much worse. That means within the next two years.

Coincidentally, this is what Robert Kiyosaki, author of Rich Dad Poor Dad, wrote in his book about the impending crash, Rich Dad’s Prophecy. I was fortunate enough to tour several continents with Robert and his Rich Dad advisors when he warned that the big crash would come in 2016. Quite how people can pin-point the exact date I will never know. Even world-class investors like Jim Rogers, who together with George Soros ran the Quantum Fund and made their investors over 4000% in 10 years tended to get it right eventually but often had to wait months or even years before they were proven right.

Meaning that no doubt another crisis will come. The question is when and what we are going to do about it to be prepared. Let’s hope for the best but prepare for the worst.

Let’s just assume we have 12 months to prepare, what are we going to do? Robert advised that we all need to stock up on the five ‘G’s we will all need when this happens:

  1. Ground – you will need a roof over your head, hopefully one you have paid off so that no matter if the money you have in your pocket becomes devalued overnight, you have a safe place for yourself and your family; but he also meant investing in property. We are not talking about buying a property and hoping it will go up in value. Robert’s way is to ensure positive cash-flow on every property and taking advantage of tax breaks by developing property
  2. Gold – by this he means having enough gold to buy grub (see below) in case your paper money becomes worthless; I would add silver to this category
  3. Gas – by this he means having enough petrol for your car; electricity to run your home and water to drink and presumably wash now and again; but he also means investing in oil rigs that have tax incentives when you invest. Most people don’t know how to do this so I have an alternative below.
  4. Grub – stocking up on baked beans and water in case you need to go underground for 2 years.
  5. Guns – to ward your neighbours off when they start rioting and steal your grub and Gold. You can tell he is an American, but you get the gist of it.

The way I look at this is similar, just without the guns. I invest in what I call Precious Resources. That is anything which:

  1. Can’t go to Zero (like individual stocks could) and
  2. Is likely to go up in value long term.

Unlike Mr Kiyosaki, I don’t know WHEN this will happen. Examples of Precious Resources are Gold & Silver and Oil. Let’s take each in turn.

Let us explore Gold for example – the yellow metal has fallen dramatically over the 4 years.
Precious Resources Example
If there is another financial crisis then Gold is likely to sky-rocket. If not, then it will do so when the next financial crisis occurs. So we know it will go back up, the question is WHEN will it go back up? In US I would invest in the Exchange Traded Fund (ETF) called GLD and the UK one called PHAU. My strategy for doing so? An advanced form of my Value Cost Average strategy which I described 2 months ago in Wealth Watch. Definitely not what most people do, which is to put in a lump sum all at once. Gold might fall further so I want to accumulate and build up a nice position over time.

Silver is much more volatile. When gold moves silver moves even more, which is why I like it more than gold, but that’s a personal choice.
Precious Resources Example
In US I would invest in the Exchange Traded Fund (ETF) called SLV and in UK PHAG. Again I would use an advanced version of my Value Cost Average strategy, entering every time it looks like it is going to turn, but not minding if it doesn’t, as I am accumulating over time.

If you have missed the article 2 months ago, you can simply download all the strategies in my book below, for free.

The question is of course whether we buy the physical gold and silver and if so where do we put it. My grandfather used to have belts of gold coins buried in his back garden and he would pull out a belt every time someone got married or there was a large expense. So it is really not that unusual to have the physical gold or silver in your house.

Personally, I like to buy both the physical AND the Exchange Traded Funds (ETFs) as I described above at regular intervals.

What about oil? Take a look at the chart below:
Precious Resources Example
I think that prices have fallen sufficiently for me to start building a position. I hope they fall some more so I can buy more at a lower price. One thing is certain – the price of oil WILL go up one day, the question is when. That’s the great thing about people like Warren Buffet and Jim Rogers. They don’t mind being wrong in the short term as long as they are right in the long term.

I don’t want to take physical delivery of a tanker of oil so I just buy the ETFs ‘USO’ in USA or ‘OILB’ in UK.

I hope this has been useful. These are just some of the ideas that we teach at our Beat the Crisis Passive Investing Bootcamp where we explore passive income. If this makes sense, then please remember you will only Beat the Crisis by taking action. Don’t be on the sidelines wondering what happened. You will learn ten times more being in the game than watching it.

For your copy of my book The Lunchtime Trader please click here!