The price of gold has surged in recent weeks. Improved investor sentiment following the coronavirus crisis has led to booming demand for the yellow metal. This increased demand has sent the price of gold back to its all-time high of more than $1,800.
Following this performance, investors may be interested in buying gold ahead of further gains. However, owning the precious metal itself may not be the best way to profit from its price performance.
As such, investors may be better off buying gold mining stocks instead.
Invest in the gold price
Buying gold can be a complicated process. Acquiring the physical metal can be expensive, and there are usually high storage costs involved. Products such as ETFs are an alternative, but these can also come with high management charges.
What’s more, there’s no guarantee of profits. If the price of the metal falls, the value of your investment will drop as well.
On the other hand, mining stocks offer the best of both worlds. Even if the price of gold falls substantially from current levels, many of these miners will still earn a profit. If it continues to rise, their profit margins will grow.
And unlike physical gold, which usually costs money to store, most mining stocks offer a dividend. This provides an income stream for investors.
Still, despite the favourable properties of mining stocks over the metal itself, it can be tough picking the right stocks to buy. That’s where the Scottish Investment Trust (LSE: SCIN) can help.
Investment trust benefits
The managers of Scottish have allocated a significant percentage of the investment trust’s portfolio to gold mining companies. Companies such as Newcrest Mining Limited, Newmont Corp and Barrick Gold Inc. Together these stocks make up around 15% of the firm’s portfolio.
Scottish owns other investments alongside these gold price plays. The rest of the portfolio is devoted to defensive equities, which can provide a steady income in uncertain times. These include pharmaceutical businesses, telecoms groups and utilities.
This approach provides investors with the best of both worlds. If the price of gold continues to increase, Scottish’s mining investments will lead to profits for investors. However, if the price of the yellow metal starts to fall, and the rest of the market rises, its other holdings will make up the difference.
And even if the market goes nowhere fast, investors should profit. Scottish has a preference for dividend stocks. As a result, the investment trust currently supports a dividend yield of 3%. So, even if the share price of the firm goes nowhere for the next few years, investors will be paid to wait. The same can’t be said for the gold price.
As such, if you are looking to profit from the gold price surge, it may be a good idea to snap up some shares of Scottish. The trust’s diversified nature and the dividend may generate high total returns for investors in the long run.
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Rupert Hargreaves owns shares in the Scottish Investment Trust. 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.