Driven by concerns over the economic impact of the coronavirus, the price of gold hit a seven-year high of over $1,600 an ounce last week. Some in the market believe the shiny stuff could breach the $2,000 mark in short order.
With this in mind, it’s understandable if many private investors are thinking of climbing on board. So, let’s look at the arguments for and against buying now.
Why hold gold?
Gold is regarded as a safe haven asset — something that tends to be negatively correlated with stock markets. If you believe the market is overly optimistic about finding a quick fix to the virus (not to mention global growth prospects), gold will help diversify your money.
Aside from this, gold is tangible. Unlike Bitcoin, it’s also easy to understand, liquid (easy to buy and sell) and hard to steal.
This is not to say that gold is without its critics.
Reasons to steer clear
Aside from the possibility that those buying now might be doing so at the worst possible time (i.e. buying ‘the spike’), one argument against holding gold is that it doesn’t generate any income. A better idea would be to buy stocks that pay dividends even through troubled times, or simply sit in cash until the crash happens, pick up shares on the cheap and await the mother of all rallies.
These arguments make sense, but they also assume a lot.
The ‘dividend argument’ assumes 1) we know in advance which companies will be able to continue returning cash to their owners during/after a crash and 2) we will still have the confidence to buy/hold such stocks when everyone else is selling. Staying in cash until we hit the bottom sounds like a surefire route to riches but only if we know in advance where the ‘bottom’ is. We don’t.
This is why I believe holding at least some gold (perhaps 5%-10% of a portfolio) makes sense, even if this price momentum doesn’t last. Better to regard it as a source of relative stability in times of strife rather than a way of making ‘quick’ money.
If you agree, the question is how to go about getting exposure.
Here’s what I own…
My personal preference is through an exchange-traded commodity fund (ETC) that tracks the gold spot price. The fund I own, for example, is the iShares Physical Gold ETC. It has an ongoing charge of just 0.19%.
A second passive fund I own a small amount of is the iShares Gold Producers UCITS ETF. True to its name, this invests in a basket of miners, making it a leveraged play on the price of the shiny stuff. It’s riskier — the share prices of these miners could end up correlating with other stocks in the event of a crash rather than the gold price — but it’s a risk I’m willing to take.
Another alternative is to hold companies that have some connection to gold other than digging it up. Within this category, I’d include pawnbroker Ramsdens Holdings (of which I own shares) and H&T, both of them with gold-buying divisions. Again however, there can be no guarantees, especially as the share prices of small companies such as these can be volatile. As always, your best route into gold will depend on a careful analysis of your own risk-tolerance.
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Paul Summers owns shares of iShares Physical Gold ETC, iShares Gold Producers UCITS ETF and Ramsdens Holdings. 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.