This year has seen the price of gold get close to its all-time record. With the yellow metal seen as a store of value during times of political uncertainty, I would not be surprised to see new gold price records in the coming years if the economy is weak. One investing response to that could be to buy gold. Another may be to buy gold shares. I could invest in businesses that benefit from the gold trade, such as miners and refiners.
Between those two approaches, which one suits me best?
Goldfinger
Buying up ingots of gold or jewellery and holding them is a common practice in some countries. Holding even a small bar of the glittering stuff in one’s hands can be literally dazzling.
As an investor, protecting the value of my investments is an important motivation for me when managing risk. As a store of value, gold can seem attractive that way (although the gold price can and does move around).
But what would I actually do with gold if I bought some?
I would not earn any money from it as owning gold does not generate dividends. I would also need somewhere safe to store it, which could add costs for me.
On top of that, when I wanted to sell it in future it may take a bit of time and effort to take my gold physically to a dealer.
Productive assets
But while gold is not a productive asset, many things are.
Take a goldmine as an example.
Firms like Rio Tinto own mines and sell the metals they produce from them. So owning a share in a miner could help me benefit from the success of such a business.
That may be in the form of dividends. If I buy into a quality business at the right price, hopefully over time I may also see the value of my holdings increase.
That largely explains why I would rather buy gold shares than the metal itself. On top of that, buying, holding and selling stocks through my share-dealing account seems easier to me than trading physical gold or finding a secure way to store it.
Time to buy?
So, with gold prices being so strong right now, does this mean it is a good time to add some gold shares to my portfolio?
Not necessarily. An industry doing well does not always mean that shares in companies exposed to it will also perform strongly. After all, in every industry, some businesses perform better than others. On top of that, expectations of a strong gold price may already be factored in to investors’ valuation of many gold shares.
My approach therefore involves looking at the prospects of individual companies. If I find a business I particularly like, I then consider its valuation.
For now, I have not added any gold shares to my portfolio. I am waiting for the metals cycle to get closer to a bottom again, in the expectation that at some point gold may once more trade far below today’s levels. I think such a market could offer me more attractive gold share valuations than is the case today.
