Gold is on a roll. On Wednesday, its price set new record highs, passing $2,000 an ounce. Based on recent events, I think there’s a good chance positive momentum will continue.
Why might gold keep rising?
Last week, the US Federal Reserve implied that it was ready to inject further stimulus into its economy via another bout of money-printing. This ‘whatever it takes’ strategy, and the possibility of other central banks following suit, increases the risk of inflation picking up.
Inflation isn’t known as the ‘silent killer’ for nothing. The rise in the cost of things means the spending power of any money you have is reduced. Investors try to counter this by moving into assets that tend to hold their value.
Another, related reason that gold might continue to soar is the possibility that we’ll get a second wave of the coronavirus, perhaps coinciding with seasonal flu. This could bring forth another bout of volatility in stocks, making it more likely that investors will seek solace in things that are negatively correlated with equities.
On top of all this, you have growing tension between China and US and the forthcoming election across the pond.
With these hurdles and no definite vaccine in sight, demand for the shiny stuff is unlikely to fall away any time soon.
How to play the gold rush
There are plenty of ways for Foolish investors to get involved. That said, the most appropriate option will depend on your financial goals, investment horizon and risk tolerance.
Perhaps the least ‘dangerous’ way of tapping into gold’s popularity is via a fund that tracks its price. The iShares Physical Gold ETC is one of the most popular options available.
For those looking for bigger gains, a diversified fund specialising in gold miners could be the way to go. The iShares Gold Producers UCITS ETF is one I hold.
For the brave…
If you really want to a leveraged play on the gold price however, you’ll need to buy single company stocks. You could buy a large, established miner like Polymetal or Centamin. You could also look for promising minnows.
A quick glance at the share price graph of a company like Greatland Gold shows just how profitable the latter strategy can sometimes be. Those who invested around the time that I first wrote about the company last August would have made a killing. Its shares are up 700% since then!
With recent talk of “exceptional” results from its ongoing drilling programme in Western Africa, IronRidge Resources could be next to jump. So too could be Hummingbird Resources, which has operations in Mali and Liberia. It wouldn’t surprise me if either were bid for at some point.
As always, those tempted to invest in stocks like these need to be aware of what they’re getting into. Expect regular double-digit percentage share price moves in both directions due to their lack of liquidity. A large bid-offer spread (the difference between what you can buy and sell a stock for) means you’ll also need to make a decent gain after buying just to get back to break-even.
Mining stocks are also no place for impatient investors. Many don’t make it into production because of the costs involved. For those that can sit on their hands, however, the wait could be worth it.
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Paul Summers owns shares in iShares Physical Gold ETC and iShares Gold Producers UCITS ETF. 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.