Since late summer 2018, the trend for the spot price of gold has been up. And given that gold tends to rise during periods of uncertainty, perhaps the move is unsurprising.
Seeing a market rise like that is tempting. But I reckon it could be a mistake right now to pile into investing instruments that track the price of gold. After all, the shiny yellow metal is near the all-time high it hit in the summer of 2011.
I reckon the old high could act as a point of resistance and we may see a pullback. But regardless of that possibility, is it wise to invest in anything when it’s trading near its highs?
To answer my own question, I’d say that sometimes investing near highs can be a good idea. For example, in the stock market, a share breaking out to new highs can signify rapid advancement in the underlying business operations.
In fact, hunting for share prices breaking out after a period of consolidation can be a decent strategy for finding promising investment situations. And you can verify the quality and value of the underlying business by doing your own analysis and research. But I’m less certain about instruments such as gold. After all, there aren’t many fundamentals to back up the price of gold. A lot of the movement in gold is driven by speculation.
And many stocks are breaking out as we emerge from lockdowns around the world and take the first tentative steps to rebuild economies. For example, we’ve seen strong recent upsurges in shares such as Renew, Bunzl, Codemasters, Hikma Pharmaceuticals and many more.
But if the short-term outlook for such firms is improving, general uncertainty could be easing. And that could weaken the gold price. Of course, we have the prospect of living through a deep recession now. But markets look ahead, and gold investors may soon start thinking about wider economic recovery after the downturn.
On balance, I’d avoid gold because it is trading near its highs. Instead, I’d rather invest in stocks because they are recovering and breaking out. However, some sectors remain mired in the mud, such as banking and the hospitality and travel industries. So I reckon it’s important to be selective. It’s a stock-picker’s market more than ever right now.
My three-step plan to help me get rich from this stock market recovery is simple. First, I’d look for strong sectors, such as IT, food supplies, healthcare, consumer staples and others. Second, I’d identify strong stocks within those sectors if they are breaking out from consolidations. And third, I’d research the fundamentals and opportunities of the underlying businesses to see if they are worth investing in.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.