Gold has been one of the best investments in 2019. Year-to-date, the gold spot price is up almost 17% and hovering around $1,523 per ounce.
In 2020, I’d like to encourage our readers to learn more about the gold market – from what drives the price of the underlying bullion and especially to how they can include gold shares in their portfolios. Let’s take a closer look.
Gold as an asset class
This precious metal has fascinated humans since the dawn of time. Today, most gold produced is used for jewellery or investing purposes.
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Globally central banks keep over 30,000 tons of the yellow metal. According to the Bank of England website “our gold vaults hold around 400,000 bars of gold, worth over £200 billion. That makes the Bank of England the second largest keeper of gold in the world (the New York Federal Reserve tops the list).“
You may be familiar with arguments about gold being a hedge against inflation and a store of wealth. In general gold has also had a negative correlation to stocks.
Many analysts recommend a 5%-10% allocation of a personal investment portfolio to gold as an insurance policy.
We cannot know the future with certainty. However, for a good number of people physical gold is an asset for defensive diversification.
Gold prices + economic/political developments
Investors may remember that in 2010, the spot price for gold was about $1,050. By late 2011, it almost hit $1,900, at which point a multi-year decline began. By 2016, it was below $1,100. In mid-2018, the current rally began around the $1,200 level.
There have been several reasons behind this tailwind in gold prices, ranging from worries about the escalating US-China tariff war, volatility in the oil market, talk of a global recession, macroeconomic fears, uncertainty in Europe (partly because of the developments on the Brexit front), and rather choppy global equities.
Analysts are also discussing the near-term possibility that US dollar interest rates may go to zero and that pressure may be put on the US Federal Reserve Board (Fed) to introduce negative rates. If US dollar deposits see negative rates, smart money is likely to move not into other currencies, but possibly into commodities, including precious metals such as gold.
So if you believe that the next bull cycle in gold is under way and would like to invest in it, then you can buy into gold in several ways.
Gold shares
In recent months, many gold miners have seen their share prices pop as the global gold price has surged. Within the FTSE 100 and FTSE 250, companies that mine gold include Chile’s Antofagasta, Mexico-based Fresnillo, Russian mining operation Polymetal, and Centamin, which focuses on the the Arabian-Nubian Shield.
If gold remains at its current price or moves higher, miners will likely report better margins and rising free cash flow, potentially boosting their share prices even further. However, income investors should note that most gold stocks are low-dividend payers.
There are also investment funds or exchange-traded funds (ETFs) that invest in gold miners. Examples of such funds would be the BlackRock Gold and General or iShares Gold Producers UCITS ETF.
Alternatively, you can also consider ETFs that invest in gold itself such as ETFS Physical Gold. The fund is large, well-known, and liquid. With an ongoing charge of 0.39%, it may be suitable for investors looking for asset diversification, especially in the short term.
