Lately, gold has been soaring. In a time of uncertainty, the precious metal is often seen as a safe haven, pushing up the price. It hit an all-time high in 2020 and recently it has been getting close to that level again. But I have no plans to buy gold and instead prefer to buy cheap shares.
Here are three reasons why.
1. Productive asset
Although it is widely seen as a store of value, gold is not a productive asset.
As investing legend Warren Buffett has wryly observed, you pay people to dig it out of a hole in the ground, then pay other people to put it in another hole in the ground and guard it.
Gold does not produce interest. In fact, it does not produce anything at all.
Like Buffett, when buying shares, I see myself as buying a stake in a business, even if on a small scale. So I want to invest in a business that produces something it can profit from.
For example, even if I wanted to expose myself to fluctuations in the gold market, rather than buying bullion, I could purchase shares in a mining company like Fresnillo. Its mines produce gold, which can be sold. In other words, the mines are a productive asset. Simply owning gold myself is not the same as buying into a productive asset.
2. Liquidity
People sometimes talk about ‘liquid gold’. In fact, a lack of liquidity is one reason I shun investing in gold, compared to listed shares in well-known companies.
Imagine I own shares in Fresnillo, BP, AstraZeneca, or any other FTSE 100 company. If my investment thesis changes, I could log into my share-dealing account and sell them in minutes. I can maintain a diversified portfolio, with exposure to different business sectors.
Spending my money on gold is a bit different. Where can I physically buy it? How can I store it safely? When I change my mind, how quickly and easily can I sell it? How do I diversify?
Investors do buy and sell gold regularly. But I think buying cheap shares, holding them, collecting any dividends, and later perhaps selling them is administratively easier.
Rather than paying to store my gold, with shares the reverse can happen. I am actually being paid to own certain shares, in the form of receiving dividends.
3. Bargain hunting
The gold price moves up and down over time. It is possible to make money from investing in gold and some goldbugs do pretty well from it.
But the metal is keenly watched. Its price may sometimes seem to be cheap or expensive, but rarely does gold strike me as a screaming bargain.
By contrast, sometimes I look at cheap shares and think (as I have done lately with Airtel Africa, for example) that the long-term value on offer is much greater than the current purchase price.
With thousands of listed shares available for purchase, I see greater possibility than for gold of finding a mismatch between the market’s current valuation of a business and its underlying value. That is why, whatever the gold price does, I will keep on hunting for cheap shares in brilliant companies.
