I think having some exposure to gold is a wise idea. This is because it’s a good hedge against financial market risk and inflation. It can provide a degree of protection when other assets aren’t doing so well.
What percentage of your portfolio should be in gold? That’s very much a matter for the individual. No more than 5% suits my Motley Fool colleague Edward Sheldon. Meanwhile, 25% was the level set by US investment writer Harry Browne for his four-asset ‘permanent portfolio’.
Here, I’ll look at investors’ options for gaining exposure to gold. I’ll also tell you about three strategic approaches, and seven stocks/financial instruments I’d be happy to buy to implement them.
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Pure play
Buying gold bars, ingots, or coins is one option for investors. If I lived in a highly risky part of the world, I’d want to have some physical gold on hand. After all, I might have to make a quick exit one day, and gold could help.
However, as I’m not in that position, I’d look instead to buy FTSE main-market-listed WisdomTree Physical Gold Fund. This gold-price-tracking investment is backed by physical gold, and the management fee is a reasonable 0.39%. It can be held in a tax-efficient ISA or SIPP just like any other FTSE stock.
Gold plus dividends
One thing that bars, ingots, coins, or the WisdomTree Physical Gold Fund don’t provide investors with is income. In contrast, a number of gold mining companies pay shareholders cash dividends for owning their shares.
Of course, like other companies, gold miners are subject to geopolitical, operational, and other risks. Sometimes, these may adversely impact a company’s profits and dividends. I’d seek to reduce the risk by owning a spread of gold-mining stocks.
From the FTSE 100, I’d buy Polymetal. This company’s assets are in Russia and Kazakhstan. I’d also buy FTSE 250 firms Fresnillo (core assets in Mexico), Centamin (Egypt), and Hochschild (Peru and Argentina).
These four stocks have forecast 2020 dividend yields of 4.7%, 2.1%, 5.3%, and 1.9%. I see the average yield of 3.5%, versus 0% from holding physical gold, as good reward for the equity risk. Gold miners also have the potential to deliver superior capital gains to gold itself. This is due to what’s called ‘operational gearing’.
Exposure with limited funds
Finally, what if you’re a new investor with limited funds? Buying a range of gold mining stocks may not be practical, due to dealing costs. Even a single stock could be out of your reach, if you feel a relatively low exposure to gold is right for you. For example, £500 in WisdomTree Physical Gold might be practical with standard dealing costs. But you’d need another £9,500 to invest in other assets, if your gold exposure target is 5%.
If I had only limited funds, but wanted some gold exposure, I’d buy Personal Assets Trust and/or Capital Gearing Trust. Both these investment companies have maintained exposure to gold bullion over the years: Personal Assets in the 10% region and Capital Gearing around 1%.
Both companies also hold a range of assets, including equities and bonds. I see them as solid foundations on which an investor can build and expand, as more funds for investment become available.
