The price of gold has been gaining ground since the pandemic began and the number of headlines warning you not to miss out is increasing. The thing that confuses me is this: if a stock investor’s mantra has long-since been “buy low, sell high”, then where is the sense in buying gold when the price is high? Surely that is a recipe for a boom and bust disaster?
Well, yes and no. It depends on how long you think the boom phase will last. No one wants to buy gold at a high price today for it to be worth a lot less tomorrow. But if your game plan is to buy physical (or virtual) gold and store it as part of a diversified portfolio of investments for the long term, then it may not be such a bad idea. Here’s why.
Warren Buffett buys gold
Warren Buffett, arguably the world’s most famous billionaire investor, has traditionally spoken against investing in gold. He reasoned that it had no purpose. Unlike farming, which feeds people, gold just looks pretty. However, in Q2, his firm, Berkshire Hathaway, bought nearly 21 million shares in Barrick Gold Corp, a Canadian gold miner. This is quite the turnaround and has value investors everywhere talking about it.
There is no doubt the pandemic has shaken up the future economic outlook in an unforeseen way, and investors are scrambling to take advantage. Berkshire Hathaway has been stockpiling cash and with its traditional stocks of choice, such as banking and airlines, out of favour, has been forced to look elsewhere for bargain shares.
Back in 1997, Buffett made a big profit on buying silver when its price had crashed. The difference this time is that gold is hovering around an all-time high, it seems a strange time for a value investor to be jumping into the precious metal and goes against the “buy low, sell high” motto. That is, unless the economic outlook is on shaky ground for the foreseeable future, which seems like a reasonable call with the way the world is.
Buy low, sell high, but don’t forget to diversify!
I agree with the “buy low, sell high” premise. It makes sense to buy bargain shares in low-cost companies with excellent prospects and hold until they realise their potential. The power of compound interest is key to amassing wealth, so the longer you can sit on an investment, the more likely you are to attain this goal. To take full advantage of compound investing and grow your wealth exponentially dividend reinvestment is vital. There are fewer companies offering dividends today, but some gold mining companies are among those that do.
If you think the price of gold will progress for many years, then you could add a gold mining stock to your portfolio. Or you could buy an ETF with a gold production slant. Like any investment, it is important to do your homework. The price of gold experiences volatility, just as the stock market does. A well-balanced investment portfolio of stocks, commodities, funds, and bonds will help dilute your overall risk. There are many bargain shares in the UK stock market this year and it could be the perfect time to build diversified holdings with strong growth potential.
Kirsteen has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). 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.