Gold is a commodity that has close ties with stock investors. Investing in gold has always been popular as part of diversifying an overall investment portfolio. It does go in and out of fashion, but certainly for 2020 it’s top of the wish list! So when looking at how best to deploy my £20,000 ISA allocation for the coming year, gold definitely has a role to play.
Why use the ISA?
An ISA is a provision from the government which allows profits to be sheltered from capital gains tax. You can simply have a Cash ISA, but the low interest rates offered currently mean many turn to a Stocks and Shares ISA. This allows you to invest into stocks you like, without having to worry about paying funds away in taxes. Really, for any stock investor, it makes a lot of sense to buy and sell via your ISA.
Gold investing: The summary
Gold is a hedge against falling stocks. When I speak of a hedge, I’m not talking about your neighbour’s front garden antics. Rather, a financial hedge is something that protects you against a negative scenario. If you held 100% of your assets in stocks this year, then naturally you’d have taken a hit due to the slump in the FTSE 100 index. If you had 20% of your money in gold, this would’ve acted as a protection (or hedge) against the stocks. Gold has rallied 30%+ this year, and is closing in on all time highs of around $1,900 per oz.
Gold is easy to buy into. Gone are the days of you having to physically buy a gold bar and either pay to store it somewhere or keep it in your safe at home. You can still do this if you want, but many now invest in gold via a tracker fund or a stock of a precious metal miner. This takes the hassle away for an investor. It also provides you with the liquidity to buy and sell instantly if you desire. A good example of a gold tracker fund is the Investec Global Gold fund. If you want to get indirect exposure via a listed company, take a look at BHP Group.
Gold has little opportunity cost, given the low interest rates. This counters one of the main criticisms of buying into gold, that gold does not pay out any dividends or interest! This is completely true, and if the Bank of England base rate was at 5%, then the opportunity cost of earning no interest on gold would make me stop and think. But the interest rate is at 0.1% currently. So by holding gold, I don’t give up much versus holding cash instead. That makes it a powerful case to hold now, even if the price remains fairly flat.
My Foolish takeaway
I’m never going to hold everything in gold, as this is too extreme. But holding some tracker funds and indirect exposure via some mining stocks in my ISA allows me to hopefully ride a move higher. At the same time it offers a hedge against my main stock portfolio.
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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.