With the global economy going to hell in a handcart it’s a good idea to get exposure to gold.
Forget about buying the physical metal itself, though. And ignore the temptation of buying a bullion-backed financial instrument like an exchange-traded fund (ETF). You’d be much better grabbing shares in a gold-mining company, a play that offers the added benefit of dividend payments.
One such share I’d happily buy today is FTSE 100 giant Polymetal International (LSE: POLY). This particular income hero boasts a colossal 5.4% dividend yield for 2020. With City analysts expecting the bottom line to bounce 31% this year it looks cheap from an earnings perspective too. It currently boasts a forward price-to-earnings (P/E) ratio of around 10 times.
Patience is key
Don’t be thrown off by gold’s failure to charge higher right now. The yellow metal has failed to build on the seven-year highs above $1,700 per ounce hit last month and was last trading all the way back at $1,610. I remain convinced that this safe haven should pick up momentum as the economic effect of the coronavirus outbreak spreads.
The sceptics need to recall bullion’s behaviour during the last financial crisis. Back in late 2008 and the beginning of 2009, gold values skulked lower. This in part reflected massive selling by traders that needed to meet margin calls. It’s a phenomenon that has pulled metal prices back in the past few weeks, too.
Remember, though that gold accelerated like a train as the true economic cost of the banking crisis became apparent, and central banks cut rates to support the global economy. The precious metal burst through the $1,000 per ounce marker by September 2008. It remained in a long-term uptrend until striking the current all-time peak around $1,920 three years later.
The same macroeconomic concerns that fuelled gold’s surge remain in play today. What’s more, there’s another investment theme picking up right now that was also critical in driving prices around a decade ago.
Just like in the 2008–09 financial crisis, it looks as if central bank gold purchases are hotting up too. That’s at least what World Gold Council data seems to suggest. These financial institutions bought up 36 tonnes of gold in February as the coronavirus crisis escalated, up almost a third from January levels. Turkey and Russia led the sales rush by buying 24.8 tonnes and 10.9 tonnes of the shiny commodity respectively.
Don’t think of Polymetal as a great buy just for the next few years, however. It’s always a good idea to have gold in one’s investment portfolio for when geopolitical, macroeconomic, and social crises emerge. The stock market sell-off of the past six weeks or so illustrates this point perfectly. And by buying this particular FTSE 100 dividend stock investors can also latch onto some monster dividend yields, too.
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Royston Wild has no position in any of the shares 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.