NEW YORK (TheStreet) -- Want to know a guaranteed way to win in a casino? Walk up to a roulette table and bet $10 on red. If you lose, bet $20, and if you lose again bet $40, and then $80, $160, $320, $640, $1280 . . . . This betting strategy is known as a Martingale betting system and unfortunately we see people use variations of a Martingale system all too often when investing.
Adding to losing positions to "average down" almost always comes too close to a Martingale to avoid the eventual loss that will happen sooner or later. The real evil with an averaging down method for most people is it gives a false sense of success from the many "wins" this system normally generates. People buy homeowners insurance for the same reason: It's the big loss that destroys years' of wealth building.
A Martingale system may work well in theory, but it doesn't work well in practice. Averaging down in gold during a bear market is the wrong approach under current conditions.
Successfully investing in gold requires higher inflation than the carrying cost of owning gold. Not all inflation is made the same way. When viewing gold in a U.S. dollar lens, inflation in non-U.S. dollar currencies is a deflationary influence on the price of gold.Take India for example. Inflation is relatively high, and the price of gold is reaching record highs. The high gold prices in India likely explain (at least in part) why gold demand in India has softened. (Read my article Buying Gold Now Is a Sucker's Bet.) India matters, too. For Americans, it's a mistake to have an overly egocentric view of the world. When it comes to investing in gold, the greatest attention on the demand side needs an Indian focus. India, faced with high unemployment and record high gold prices leaves little upside for increasing demand for gold. More problematic than unemployment is the massive trade imbalance India faces causing the parabolic fall in the Rupee to begin with. The Indian rupee made new lows last week in dollar terms. A dollar will now buy about 57 Indian rupees. At the start of 2011 a dollar would buy less than 46 and before the financial crises at the start of 2008, a dollar would only buy about 40.
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