During times of uncertainty, many investors look to buy gold. This may be actually owning physical gold, or having exposure via a financial instrument. For example, you could buy an exchanged-trade fund (ETF) that tracks the price of gold. Or you could buy a stock of a mining company with large exposure to gold mining and production.
The reason why many flock to gold is that it has a store of intrinsic value. I know that my bar of gold is actually worth something tangible, in comparison to some other assets. One of the reasons that Bitcoin has struggled to really take off as a mainstream investment is that nobody really knows its intrinsic value.
Over the past six months, we have seen the price of gold rally to multi-year highs as investors have become unsettled by the state of the world. Following the outbreak of the coronavirus pandemic, gold hit a high just shy of $1,700 per ounce this month.
Yet since then, it has actually fallen, with the price last week dropping below $1,500 per oz. This is because some investors are having to sell their gold in order to pay for losses incurred on other investments, as well as for margin call payments.
The first reason I still prefer buying stocks over gold is from an income point of view. Gold as an asset does not pay any income. It never has and never will do. In fact, if I buy enough gold, I actually have to pay an ongoing cost to store it safely!
With a stock investment, I can buy into a firm which pays me a dividend. Given that my overall yield on this dividend it worked out by dividing the share price by the dividend per share, the recent sell-off makes many yields look more attractive. A firm may be financially unaffected by the recent virus but may have seen a sell-off in share price due to general sentiment. Thus, the dividend is still going to be paid, but the share price is lower. This generates a higher dividend yield, and gives me a source of income during the market crash. This is something gold will not do.
Good examples of dividend paying stocks are mentioned by my colleague Roland Head here.
Buy low, not high
The golden (if you’ll pardon the pun) rule of investing is to buy low and sell high. So which asset should I technically be buying at the moment? I could buy gold, which hit eight-year highs this month. Or I could buy shares in the FTSE 100, which hit lows last week not seen for a decade.
For me, the sensible option is to buy the undervalued stocks in the FTSE 100. I wrote about two examples recently which I like. Ultimately, I am not against owning gold, but I would much prefer to buy it during the good times when the price is low. That is why currently I would avoid gold over stocks.
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Jonathan Smith and The Motley Fool UK have 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.