Can the gold boom continue?

Despite the gold price rising over 30% in 2020, one fool looks at the reasons why the rally may not be ending for some time.

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It’s fair to say gold has had a good run during the pandemic. An ounce of gold closed for the week above $2,000 for the first time in history on Friday. That’s great if you own gold, but it’s not a sign of a healthy global economy. Not that we need any more indications of that at the moment. But even as gold pushes to new records, opinion pieces in the various financial publications deride gold, claiming it’s overbought. Even gold bull Dennis Gartman says he’s getting out of gold and waiting for a correction.

So, can the gold boom continue? Here’s one reason why it might, and why you might want to invest in it.

Gold is REAL money

Gold has intrinsic value. It’s a great metal for jewellery of course, but it also has applications in computer hardware and other tech. The reason it’s not used more is because it’s expensive. Why is it expensive? Because it’s rare.

The most annoying thing about gold for Jerome Powell (chairman of The Federal Reserve in the US) is that he can’t print it. Dollars on the other hand – no problem. The actual method of money printing via quantitative easing (QE) is complicated, but the end result is more dollars and thus the money supply increases. This sneaky bit of financial engineering is allowing the US government to borrow dollars that didn’t exist yesterday and the Bank of England is doing the same thing. Gold supply, on the other hand, is far more constrained. Only a certain amount can be mined per year in practice – and that number’s pretty stable. So as paper notes increase in supply exponentially, but gold supply remains fixed, more and more paper notes will be needed to buy it. This is inflation which, incidentally, the Fed is expected to commit to ramping up.

How you can invest

The savvy investor will want to profit from this, and here’s how:

  • You can buy gold itself. The Royal Mint Bullion offers the opportunity to buy and sell physical gold. Alternatively, investors can consider physical gold exchange-traded funds (ETFs), such as the WisdomTree Physical Gold ETF or the Invesco Physical Gold ETC. The only concern is gold’s volatile price. You shouldn’t put a big chunk of your portfolio in any commodity.
  • You can buy gold-mining companies’ stocks. Within the FTSE 100 and FTSE 250, companies that mine gold include Chile’s Antofagasta, Mexico-based Fresnillo, Russian mining operation Polymetal International, and Centamin, which focuses on the Arabian-Nubian Shield. Gold-mining stocks tend to be more stable than the underlying commodity and they pay dividends.

If you have some money set aside for investing — like £1k, for instance — my top pick in the gold sector is FTSE 250 firm Centamin, which produces gold from its Sukari mine in Egypt. Like most gold-miners, Centamin has benefited from the run-up in the price of gold over the last five years. With gold prices rising and potentially rising even faster soon, profits could be set to shoot up. And with a dividend yield of 4.35% and a P/E of 18, a share price of 221p doesn’t look too pricey to me, even if it’s not as good a bargain as at its 149p low in June.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Toby Aston has no position in any shares mentioned. The Motley Fool UK has recommended Fresnillo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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