Could there be another gold boom on the horizon? With the global economy looking shaky, some analysts think a flight to (perceived) safety could see people buying gold, pushing the price up. But I have no plans to buy gold. I would rather put money into my Stocks and Shares ISA to take advantage of what I see as the cheap prices and attractive dividend yields of some British shares.
Here are four reasons why.
1. Diversification beyond a single asset class
One simple reason I would not to focus my investment in gold, or indeed any other single asset class, is risk management.
Some asset prices go up, while others go down. If I have a diversified Stocks and Shares ISA, hopefully I could aim to balance out some of the rough with the smooth.
Putting my eggs in one, golden, basket, exposes me to more concentrated risk than I think is wise as an investor.
2. Gold is a cyclical market
Over time, the price of gold tends to go up at times of insecurity, while it often retreats when the wider investor feeling moves into strongly bullish territory again.
Seeing gold as a store of value is one thing – and I would consider buying it for that reason. But when it comes to gold as an investment, the cyclical nature of the gold market puts me off.
I prefer to invest in what I think are great assets at a fair price, rather than trying to time the market.
But if I simply buy gold and it turns out that I have bought at a market peak, it could be years before I can sell my gold even at the price I paid for it.
3. Productive versus unproductive assets
That could be true of some shares too, of course. If their price falls after I buy them, it could be years before I could sell them at the price I originally paid (if ever).
But at least some shares in productive businesses could reward me along the way by paying dividends due to the earnings from such assets. Indeed, I see my Stocks and Shares ISA as a potentially lucrative source of passive income streams in the form of dividends.
Gold is not a productive asset, so owning it would not generate any income for me. Actually, the reverse is more likely true: I may end up paying to store it safely.
As Warren Buffett says, gold “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility”.
4. Buying into the producer not the asset
Indeed, even a company that owns a gold mine has a productive asset.
So if I did want to expose myself to gold, I would be more likely to buy a company that owns gold mines (like Rio Tinto or BHP) than physically purchasing gold.
Adding a position in Rio Tinto to my Stocks and Shares ISA would yield me 7.7% at its current share price. By contrast, owning gold mined by Rio would pay me nothing.
