Gold is a commodity that splits opinions among investors. On the one hand, there are those that love the precious metal for its rare qualities and historical protection against market turbulence.
On the other hand, there are those investors who believe that gold is not really an investment because it has no cash flows. Without cash flows to prop up the price, it is difficult to value the commodity, and as a result, the asset is more speculative, i.e., you are betting on the price going up and not investing in a productive asset.
Until recently, I was in the latter camp. For the past 10 years, gold has failed to live up to expectations, and an investment in any stock index would have substantially outperformed the yellow metal.
However, heading into 2018 I changed my view on gold and decided to devote a small portion of my portfolio to the asset.
Protection against uncertainty
There are three main reasons why I decided on this course of action:
- The geopolitical situation around the world has only deteriorated since Donald Trump became president of the US. I don’t want to be caught off-guard if a tweet storm from the president suddenly causes a war in Asia.
- Inflation has made a comeback. Historically, the gold price has proven itself to be a great protect against inflation.
- Since the financial crisis, central banks around the world have been pumping money into stock and bond markets. In 2018, for the first time in 10 years, central banks are set to be net sellers of assets, and it is unclear how the markets will react to this shift. Indeed, central bank buying has been blamed for suppressing market volatility and pushing asset prices higher since 2008. No one knows what will happen when the punch bowl is withdrawn.
With these three factors set to weigh on the markets in 2018, I’m looking to gold to provide some insurance for my portfolio in the year ahead.
Not for everyone
Of course, this might not be a suitable strategy for everyone and if you are looking for another investment with similar qualities to gold, gold mining stocks might be a better buy.
Unlike the metal itself itself, miners such as Randgold Resources and Centamin do produce cash flows and they both return some of this cash to investors via dividends (unlike buying pure gold, which costs money to store and offers no income.)
What’s more, these gold producers are highly leveraged to the gold price. If prices should spike, then these miners, with low operating costs, should see profits surge, which will allow further cash distributions.
Unfortunately, other investors have the same idea and both Randgold and Centamin trade at premium valuations. Centamin trades at a forward P/E of 19.1 and Randgold at 32.3. Still, yields of between 3% and 1.9% are on offer.
The bottom line
So overall, with uncertainty building, it could be time to invest in gold for 2018, as a way of protecting your portfolio from turbulence. And if gold is not for you, one of the gold miners might be a better buy.
