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Forget investing in gold! I’d invest in gold mining companies right now

You might have noticed that the price of gold has been going broadly up for the past year or so. And as a rule of thumb, precious metals such as gold and silver tend to do well in times of economic uncertainty, and there’s certainly plenty of that around.

But scope back on that gold chart and it’s plain to see that the price of gold has actually performed strongly over a period of around 18 years. Indeed, the spot price was near $266 an ounce in September 2001, which compares to $1,500 an ounce as I write.

Extraordinary economic times

Some investors have always suggested holding a portion of our individual investment portfolios in gold. I haven’t done so over the last 18 years, but if I had, that investment would be up by more than 460%.

General price inflation will likely keep the price of gold elevating gradually over time, but it seems clear that gold has appreciated way beyond anything required to keep up with inflation since the beginning of the century, suggesting that economic uncertainty has been present by the truckload.

And we could easily argue that we have lived through quite extraordinary economic times. For example, we’ve seen the rise and dominance of the internet, which has been responsible for all kinds of disruption in various industries. On the stock market, we had the dotcom boom followed by the ‘tech-wreck.’ Then we saw the so-called commodity supercycle rally followed by the credit-crunch and then the ‘great’ recession between 2007 and 2009.

From that flowed the extraordinary economic conditions we see today, characterised by negative bond yields, über-low interest rates, quantitative easing, executive and banker pay bubbles, austerity economics, pay freezes. When I think about it all, the way that the price of gold has outperformed starts to make sense.

Why I’d pick the miners

So should we pile into gold now? Well, I certainly wouldn’t buy the physical asset  – there’s too much hassle in that approach for my liking. And I wouldn’t bother with a derivative instrument, such as a spread bet, which would simply track the price of gold.

Instead, I’d take my usual approach and look for shares of stock-market-listed companies, which could benefit from the theme of a rising gold price. Because unlike physical gold, companies can expand their operations, create additional value while we hold their shares, and pay us a dividend.

For example, I like the look of some of the gold mining companies because when the price of gold rises, their profits and asset valuations will likely rise, which could be reflected in an elevating share price. Indeed, some have been doing well for investors lately.

But be careful, because a falling gold price down the road could lead to sudden and deep reversals in gold mining companies’ fortunes and their share-prices.  

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.