Playing the lottery vs. building real wealth

Those who are looking to get rich quick can try their luck at lotteries, casinos, or highly leveraged derivatives markets. Most who do will, predictably, end up getting poorer.

A sound investing strategy won’t necessarily bring you jackpot gains, but it will protect you from disastrous losses while putting you in a position to build real wealth over time.

The Mega Millions jackpot (still unclaimed) surpassed $1 billion last week. The chance, however remote, of winning an astronomical prize will lure millions of people to commit hard-earned cash toward a rigged, negative-expectation game.

Whether it’s governments that issue lottery tickets, casinos that entice players to roll the dice, or Wall Street firms that take fees and commissions from traders, the house always gets a cut of the action regardless of whether you win or lose.

Casino gamblers who want to give as little back to the house as possible choose bets with the lowest house edge. It can vary from as high as 15% on some slot machines and side bets at table games to as low as 1% on blackjack, baccarat, and certain video poker machines when played with a proper strategy.

Wall Street employs management fees, commissions, “routing” costs (often hidden), and bid/ask spreads to generate revenue at the expense of investors. Futures exchanges can be even more opaque and predatory, with large institutional traders manipulating markets to their advantage.

Last August, four former JPMorgan Chase employees were convicted of federal fraud charges for manipulating precious metals futures contracts. They had put in fake orders (“spoofing”) to cheat other traders in gold, silver, platinum, and palladium markets.

With some games, it’s simply best not to play. The majority of individual speculators who try to play in leveraged derivatives markets controlled by large institutions, not surprisingly, end up losing.

The surest, safest way to bet on rising precious metals prices is to buy physical bullion. Commonly available, widely recognized coins, rounds, and bars tend to offer the best liquidity, the lowest bid/ask spreads, and the lowest premiums over spot.

Obscure and “collectible” coins, by contrast, typically entail large costs paid to the dealers who peddle them.

Overcoming the “house edge” on numismatic products can require a massive amount of market appreciation over time – and even then, the actual realizable gains would likely be less than on low-premium bullion products that would have appreciated closely in accord with spot prices.

Putting your money to work in cost-efficient investment vehicles is key to long-term success. Also, the key is knowing when to hold, when to fold, and when to double down.

At the casino, some gamblers employ a Martingale betting system which requires them to double their bets after each loss until they show a win. It works provided long losing streaks can be avoided. But when it fails, it fails spectacularly – potentially wiping out the gambler’s entire bankroll.

Fortunately for non-leveraged investors in physical precious metals, losses are never that dramatic.

Gold and silver prices will never go to zero like losing bets can. But they certainly can be streaky.

Some investors try to take advantage of winning streaks by employing positive progression – adding to positions after they go up in price. The advantage is that they’re using profits to build on and amplify gains.

The disadvantage to positive progression is that it risks having the investor take out the biggest stake at a market top.

With negative progression, buyers add ounces of precious metals on price drops. The advantage is that investors are pursuing value and setting themselves up to take out their biggest stake at a market low.

The disadvantage to negative progression is that prices may continue falling after the investor goes “all-in.”

Prices may never drop from an initial purchase, thus never giving the investor the chance to take out a full position.

Price movements are impossible to predict with any regularity. Given that, investors can protect themselves from the risks of being on the wrong side of up, down, or sideways markets by simply adding to their positions regularly, regardless of price, in accord with their long-term objectives.

This strategy is also known as dollar-cost averaging. Money Metals’ Monthly Savings Plan makes it easy for bullion investors to implement. Just Choose the monthly dollar amount you wish to invest (as little as $100) or the monthly number of ounces you want to buy. By exchanging depreciating U.S. fiat currency for sound money regularly, you’ll have good odds of coming out ahead over time in terms of purchasing power.