Has Gold’s Moment Finally Come?

Gold is starting to shine again. On Thursday, the price jumped $56 in a day to hit $1,249 an ounce, and it’s now up nearly 15% in the last month. You don’t need me to tell you the reason. Gold is seen as the ultimate safe haven, and with more than £140bn wiped off the value of the FTSE 100 in the last fortnight, investors are clamouring for sanctuary. Cometh the hour, cometh the precious metal. Is this the moment gold bugs have been waiting for?

All that glisters…

I’ll make it clear: I’m no gold bug. For years, I’ve swatted away their arguments like so many gnats. In June 2014, almost two years ago, I argued on this site that “gold is the riskiest investment in the world”, and rather than a store of value it’s a massive store of risk.

At the time, gold traded at $1,249, almost exactly the same price as today. But it had fallen sharply since peaking at around $1,900 in August 2011. Anybody who invested at its peak would have lost more than a third of their money. You can also lose money on the FTSE 100, naturally, which is down a quarter since peaking at 7,122 last April, but we know stocks and shares are risky, where gold has this wholly unmerited aura of security.

Gold rolled

Gold can be highly volatile. The price spiked to $850 in 1980, following the Islamic revolution in Iran and Soviet invasion of Afghanistan, then collapsed to $250 as the panic subsided and stayed there for more than 20 years. Gold doesn’t always have the Midas touch. 

There was a fresh rush into gold after the financial crisis but many came over to my side after the subsequent price collapse. Last August, when Black Monday in China triggered a global stock market meltdown, the gold price was oddly unmoved. Wisely, in my view, investors decided to put their faith in an equity market rebound rather than weigh down their portfolios with gold bars.

Golden days

Now share prices are falling again and nobody knows when the rout will end, as a collapse in sentiment threatens a negative feedback loop. Investors are rushing into fixed interest, driving 10-year bond yields to near-record lows in Europe and the US (they’re already negative in Japan). As a global currency war looms, I can see why some might prefer precious metal over sullied fiat currencies.

I also accept that one of the arguments against gold (that it doesn’t pay interest) scarcely applies in an age when cash and bonds barely pay interest either.

Yet I’m still not touching gold. Instead, I’m doing what I did after Black Monday and buying shares at bargain prices. I still believe the best way to make money from investing over the long term is to buy dividend-paying stocks and reinvest those payouts for growth. With the FTSE 100 down sharply and yields topping 4% a year, today’s market falls are a golden buying opportunity, rather than an opportunity to buy gold.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Apple. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.