Taking a Loan

[BadJuju]

Would you guys recommend getting a student loan to increase my allocation in PMs?

[*T*]

Re: Taking a Loan

I would not recommend leverage.

[BadJuju]

Re: Taking a Loan

Even considering what we know about the trajectory of the economy? Thank you for the reply, sir.

[astonas]

Re: Taking a Loan

Would you guys recommend getting a student loan to increase my allocation in PMs?

No.

Student loans are a rather dangerous form of debt. They may not be discharged in bankruptcy. This alone makes them a poor choice for any discretionary spending, let alone investment spending. Use them only when absolutely needed.

The best return on invested capital that uses your student status is found by studying hard, in a field that is likely to provide a large increase in employment income. STEM (science, technology, engineering, and math) are generally considered to be good candidates.

[Milton Kuo]

Re: Taking a Loan

*T* has it right on warning about the dangers of leverage. That said, however, if you want to speculate and do a carry trade, I personally think gold is one of the safer carry trades I see out there. A few things to consider, though, before doing a carry trade.

• What is the rate of interest you have to pay on the borrowed money? Preferably, it's comparable to what you can earn on savings (less than 1% ) but that's not likely. If it's more than 5%, it's probably not worth it since draw downs could give you sleepless nights.
• The loan must be non-callable. That is, if you borrow the money for 5 years, there must not be a clause where the lender can ask you pay off the entire loan before the 5 years are up.
• The term of the loan should be as long as possible to give the trade time to work. A one-year loan puts a lot of risk on you that you got the timing right.
• Your source of income must be reliable. This doesn't necessarily have to be a good, steady job but you must be in a situation where if you lose your job, you can quickly find another job that pays well enough to service the debt.

I haven't been able to find a lender who's willing to lend me a lot of money at the terms I want so I've gone a different route for getting a little bit of leverage: I've written January 2014 in-the-money puts against the GLD ETF and am waiting for the puts to go out-of-the-money. I run a couple of risks beyond the timing and pricing of gold with this trade:

• Someone might put the stock to me, which prematurely ends the carry trade and requires me to have the capital to buy the stock. This could occur during a period when gold falls precipitously and I would be looking at a loss if I immediately sold the stock. Assuming I am unwilling to take a loss, mitigation of this situation would require that I hold the stock until gold recovers.
• All the gold bug talk about GLD being a fraud and not having the gold it is purportedly backed by is discovered to be true. I lose big in this scenario as I'm forced to buy stock that is potentially worthless. My feeling is that if GLD is fraudulent, it's not going to be discovered until prices of gold are much, much higher and I will have ended the trade by then.

[BadJuju]

Re: Taking a Loan

No.

Student loans are a rather dangerous form of debt. They may not be discharged in bankruptcy. This alone makes them a poor choice for any discretionary spending, let alone investment spending. Use them only when absolutely needed.

The best return on invested capital that uses your student status is found by studying hard, in a field that is likely to provide a large increase in employment income. STEM (science, technology, engineering, and math) are generally considered to be good candidates.

Thanks for the reply, astonas. I will consider avoiding it, then. I will actually be completing my Electromechanical Technology associate's degree this semester. I hope to employ it to great effect! The average in the electrical or mechanical industries is in the mid-50s. Around here, the average is 55. So there is supposedly going to be a pretty major shortfall within the next decade. And these aren't the type of jobs most people can continue doing into their 60s.

*T* has it right on warning about the dangers of leverage. That said, however, if you want to speculate and do a carry trade, I personally think gold is one of the safer carry trades I see out there. A few things to consider, though, before doing a carry trade.

Thanks for the information, Mr. Kuo! I'll have to think about what you said. Good stuff!!!

[photoncounter]

Re: Taking a Loan

Would you guys recommend getting a student loan to increase my allocation in PMs?

On a slightly different note, but here's what I did and how you can apply to your case.

Around 2003-2004, credit card companies were offering money for free (0% with no transaction fee for 12-24 months) -- I didn't understand the reason then, but definitely do, now . I borrowed money from them in increments such that I could pay them back within the 0% APR time frame. Then, if needed, I would open another card (with similar terms) and then close down the previous card. I always kept 1 or 2 cards for regular everyday use and always paid in full ever month and for a long credit history. I paid most of my tuition this way. This worked cause I had a small and steady income and I made sure I borrowed only the amount that I could pay back within the stipulated time. As soon as I borrowed, I divided the loan amount by no of months and initiated an auto-pay each month. I graduated almost debt free. Note that this was during grad school, when I had to pay the tuition for 2 years and then was on a scholarship for 3.5 years with a decent stipend. Also, I built an amazing credit history this way.

I noticed that the lending landscape changed after the 2008 collapse for about 2-23 years when they offered no free money and charted 3-4% transaction fee, even on new cards. This has changed again in the past few months. I see offers for 0% APR for 18-14 months on new cards with no balance transfer fee (most of the time they will just write you a check if you ask them). I have been working for a few years and don't necessarily need the free money, but I still use it periodically, for e.g. to pay off in full or part of a higher interest rate loan (for e.g 3-4% car loan) with 0% CC loan. Again, this works since I have a steady income and I make sure I only borrow whatever I can pay back in time.

Basically, the idea is to meet your short term capital needs that you are certain you can manage in the long term (1-2 years) through regular income. I started by purchasing my first laptop this way (paid $100 a month) and then slowly scaled up.

In your case you would be leveraging since you will be making an investment that could lower in value. But, if you think you would like to purchase PM's since they are in your price range, you could potentially borrow from CC's in small chunks that you can pay back in time.


http://www.shopcreditcards.co/balanc...FWIGRQodVUkAjg

Note that this is not an advice, just pointing out that if one is alert and manages one's finances wisely, there are opportunities out there.

[BadJuju]

Re: Taking a Loan

Ah, that is quite wily, photon! Thank you for the insight. I'll consider it.

[flintlock]

Re: Taking a Loan

Hell no! School debt has been known to lead to serfdom. There's investing, and there's gambling. I like to look at Gold as wealth preservation, not winning the lottery. Though it would not bother me if it worked out that way! If you have no wealth then you really don't have anything you need to preserve. School loans are for investing in your future income stream, though I feel schools are very over priced right now. I'd find another way personally.

I did some of the 0% credit card thing also. But only relatively small amounts where I could pay it off at any moment if need be. I suspect you are not in the same situation?

[vt]

Re: Taking a Loan

Badjuju,

With the economy so uncertain, and with EJ possibly seeing a recession and currency realignment, it might be wise to hold off any committments until the picture is clearer on this forum. EJ is not infallable, but his advice has been extremely valuable over the past 12 years.

Out of the potential wreckage to come there may appear great opportunities. You are arming yourself thru education with marketable knowledge (for which you are commended). You may even find entrepreneurial positions.

I wish you all the best.

P.S. You are entirely right that this problem has been with our political leadership for decades.

[BadJuju]

Re: Taking a Loan

Thanks for the good advice and well wishes. I have actually decided to purchase some gold with a credit card that does not have any interest for 15 months. And I have the money to pay it off should I need to.

[globaleconomicollaps]

Re: Taking a Loan

Hell no! School debt has been known to lead to serfdom. There's investing, and there's gambling. I like to look at Gold as wealth preservation, not winning the lottery. Though it would not bother me if it worked out that way! If you have no wealth then you really don't have anything you need to preserve. School loans are for investing in your future income stream, though I feel schools are very over priced right now. I'd find another way personally.

I did some of the 0% credit card thing also. But only relatively small amounts where I could pay it off at any moment if need be. I suspect you are not in the same situation?

I would also like to chime in here. Gold has had a spectacular run, but it is having something of a bad year right now. If you are in dollars, you are looking at $19/oz for 7 months. This is a pretty shocking setback if you where looking for double digit growth. Also an AA is a two year degree. Why would you consider getting a loan for an AA? Community College is not as cheap as it once was, but still. What are you going to do if gold has two bad years in a row? You have to start paying off that loan as soon as you graduate.
One more thing. I happen to think that gold is looking good in the long run, but you have to consider that we have had 11 years of up and this is something of a speculative thing now. What if gold goes to $3000 + but nothing much happens until 2018? Are you going to have the self discipline to not sell for year after year? What if your wife or girlfriend is leaning on you?

Just a few of the opportunities that passed me by as a result of having my money tied up in gold:
*) credit default swaps on Greek govt debt up more than 10x
*) rare earth minerals up 20x ( much more with leverage )
*) buying and holding 2 year treasuries yield move from 2% to 0.2% ( this is not the same as a 10x , but very very big. )

Think of gold as a way to preserve your wealth after you have significant savings. If you want to gamble, talk to Bart and Finster.

[BadJuju]

Re: Taking a Loan

Thanks for the reply, global. I did not see it until now. Unfortunately, I have rather significant amount of school loan debt, but it is what it is at this point. I've decided against taking out further loans, but just shoring things up where I can.

[don]

Re: Taking a Loan

I've decided against taking out further loans

and what does Momsy have to say . . . .

[BadJuju]

Re: Taking a Loan

and what does Momsy have to say . . . .

What?