As I write, the price of gold has broken out to new highs, driven, no doubt, by escalating tensions in the Middle East. Gold is seen by many investors as a safe haven in times of economic and geopolitical uncertainty, so the move makes some sense. But it’s not the only commodity on the move. Oil is up too, perhaps inevitably given that a lot of the black stuff comes from the region.
Other risers performing strongly since December include the rest of the primary precious metals, platinum, silver, and palladium. But I wouldn’t chase any of those commodities up by speculating on their price movements directly now. If the recent moves have been caused by uncertainty in the region, any easing of the situation could cause the recent price advances to reverse later.
The other side of the coin
To me, a better way to employ a £20k investment today is to look at the other side of the coin. If precious metals and oil are going up, we often see pressure on share prices to go down. And during times when the outlook is a bit murky, the shares of some otherwise decent companies can sell at fair prices. It’s the classic investment style of arguably the most famous investor of all time, Warren Buffett.
Buffett is known for once uttering the statement, “You pay a high price for a cheery consensus.” And he made most of his billions by exploiting the reverse of that truism – that when the outlook is murky, share prices can set a lower, fairer valuation on companies.
Classic wisdom from Buffett and his business partner, Charlie Munger, suggests we should become greedy about buying the shares of great companies when the stock market is fearful. The idea is that by buying at lower prices, there’s greater potential for the shares to rise and lesser potential for them to fall after we’ve bought them – if the underlying business continues to perform well.
The potential for valuation up-ratings
Having bought stocks at fair valuations, a fair bit of the return we often see in the years ahead can arise because of a valuation re-rating upwards, as the outlook normalises to become rosy again. A great recent example of that phenomenon exists in FTSE 250 company Greggs, which has re-rated over the past 10 years or so. Ongoing operational progress and a hefty up-rating in the valuation delivered a more than 400% capital gain to shareholders over the period.
So I’d forget gold. Instead, I’d double up on efforts to research shares with high-quality underlying businesses and build a watch list. Then I’d watch it carefully, and when those share prices spike down or drift lower and the valuations start to look attractive, I’d be ready to pounce and buy some shares. To me, that’s a better way to aim for turning £20k into a £1m over time than by chasing rising gold and commodity prices in troubled times.
