It’s been a difficult week for gold investors. That’s been the case if you’ve exposure to a financial instrument backed by the precious metal, bought physical assets like bars and coins, or purchased shares in one of London’s many quoted gold producers. The values of all these assets have taken an almighty whack in recent days.
Bullion prices were recently sailing along at seven-year highs, a shade off $1,690 per ounce. What a difference a week makes though. Gold is now desperately clinging onto the critical $1,600 marker and is down again in Tuesday business.
The tragic coronavirus outbreak of course drove yellow metal prices to those fresh significant peaks last week. And the threat of a global pandemic remains elevated given the recent spike in overall infection rates. So what exactly has gone wrong?
Not done yet!
Well gold’s recent troubles have been twofold. Firstly, as my Foolish colleague Kirsteen Mackay points out, that shocking price decline has been caused in large part by many institutional investors liquidating their holdings in order to meet margin calls.
Secondly, gold’s drop has been fuelled by signs that global governments are becoming more proactive in trying to contain the COVID-19 spread. This has, in turn, damaged demand for flight-to-safety assets.
So has gold’s race been run, then? Not in the slightest, at least in my opinion. It’s clearly too early to say whether programmes to address the virus will prove effective. The infection rate continues to climb in the meantime. The number of corporate profit warnings continues to climb. And some forecasts on the probable impact of the spread have become truly scary.
It’s also worth remembering that gold recovered strongly following the margin calls that prompted massive selling during the 2008/09 financial crisis. Indeed, the yellow metal strode steadily higher until finally reaching record peaks of $1,920 per ounce in the autumn of 2011.
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The direct threat posed by the coronavirus isn’t the only reason why gold could rise of course. A likely loosening of global central bank policy would boost metal demand as a hedge against inflation too. Fears over Brexit, US-China trade wars, recession and political turmoil in Europe should also support safe-haven demand.
It’s always a good idea to have access to gold. I’d argue that buying shares in gold producers is a greater way to have exposure. This investment method allows individuals the benefit of riding a rising metal price as well as getting hold of some really chunky dividends. Polymetal and Centamin are best-in-class on this front, both offering forward yields north of 5%.
Another good idea would be to buy shares in an exchange-traded fund (ETF) backed by a basket of gold producers. Mining is unpredictable, difficult, and often disappointing business, as Fresnillo’s results today underlined. It said pre-tax profits tanked 63% in 2019 because of lower gold and silver production.
So having exposure to a cluster of gold producers rather than just one or two clearly spreads out the risk for investors.
