One thing we’ve seen in recent years is that leveraging (borrowing money to fund part of the purchase of an investment) can light a fire under the growth of your assets. Hedge funds and private equity funds used leverage to create astounding returns for several years. But that fire can get out of control and burn you, as the hedge funds and private equity funds certainly found out. The same goes for leveraging gold. There is no quicker way to make money in gold, and no quicker way to lose it, than by leveraging it. The greater the price volatility, the greater the risk, because even if you are right in the long term, you can be squeezed out by margin calls in the short term due to sharp short-term declines in the price. The price may jump back to its high very quickly, but you may have lost much of your money in the dip when you couldn’t make the margin calls on your highly leveraged gold investment and had to sell your position at a low price.
Because we believe there will be greater volatility in the beginning of the gold bubble, we suggest you keep your leverage more limited. However, as the gold bubble begins to take off with the dollar bubble pop, you should probably increase your leverage.
If you decide to buy on margin, the amount of margin you can get is controlled by the government, as with any brokerage account. But, depending on the volatility of gold, you can leverage three to five times. That means at a three times leverage you can get $30,000 worth of gold for $10,000 cash. There are also significant interest costs associated with leveraging.
Gold now and in the future will likely be highly volatile, so be careful. We can’t tell you how much leverage to use since the amount of leverage you can take on is very much a factor of your wealth and willingness to take risks. All we can say for sure is that for most people leverage is like alcohol: Use it in moderation.