Gold has recently hit a high for 2020 and the spot price is up over 10% year-to-date, hovering around $1,670 per ounce. In mid-April it went over $1,725 to see its highest level in almost a decade. Our readers may remember that it had hit an all-time record of $1,900 in September 2011.
The performance of shares is usually negatively correlated to gold, which tends to do well when there is fear in equity markets. Do you also think there is a case to be made for gold now? Then there are several ways you can include it in your portfolio.
Should you be a gold bull?
A tug-of-war between bulls and bears is raging in equity markets. I’m in the camp that believes share prices are likely to remain volatile for the rest of the year. And I expect main stock indices to once again swing lower in the coming weeks. That could be good for the price of gold, which is usually regarded as a ‘safe haven’.
The other reason I am bullish on the precious metal in 2020 is the cheap money that is globally available. Many central banks, including the Bank of England, have cut interest rates further to help avoid a hard economic landing. There tends to be a negative correlation between gold and interest rates.
Finally gold has a limited role in industry. So, unlike other commodities such as silver and platinum, it is not affected by a potential economic contraction.
Many analysts recommend a 5% to 10% allocation of a personal investment portfolio to gold as an insurance policy. Investing in the physical asset is one option. In the UK, you can buy the precious metal through the Royal Mint Bullion.
There are also exchange-traded funds (ETFs). Two examples would be the WisdomTree Physical Gold ETF or the Invesco Physical Gold ETC.
Another way to participate in a potential rally may be to invest in gold-miners. Which mining shares could be worth backing now? I’d encourage investors to look for companies with a strong asset base, experienced management, and a robust balance sheet.
Within the FTSE 100 and FTSE 250, companies that mine gold include Chile’s Antofagasta, Mexico-based Fresnillo, Russian mining operation Polymetal International, and Centamin, which focuses on the the Arabian-Nubian Shield.
So far in 2020, the returns for these four companies have been minus 14%, plus 10%, plus 27%, and plus 4% respectively.
It is important to remember that when a company owns a mine, it also owns all of the gold stored within it. However, there may be geopolitical risks regarding the country where the mine is located.
Investors should also note that most gold stocks are low dividend-payers. So they may not be appropriate for passive income investing.
Finally, there are investment funds that invest in various miners, such as the BlackRock Gold and General, UBS Solactive Pure Gold Miners ETF, or iShares Gold Producers UCITS ETF.
All asset classes have their advantages and disadvantages. I believe the rally in gold will likely push the price over $1,750 or even higher in the rest of the year. However, your guess as to where the precious commodity, and the companies that mine it, go in the rest of the year is as good as mine. As always, research your investments carefully and invest in companies your really believe have a long-term future.
tezcang has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo. 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.