Should you invest in gold in 2020? As you would most likely know, gold has been highly valued all around the globe throughout the millennia. In Greek mythology, Jason stole a fleece made out of it and King Midas transformed ordinary objects into it with a simple touch. Gold is fashioned into beautiful jewelry. It is in some of our favorite phrases – usually ones with positive meanings: “Go for the gold!” (as in an Olympic gold medal), “He’s worth his weight in gold,” “She’s got a heart of gold,” or “The streets are paved in gold.” A CEO who gets an enormous amount of money upon leaving a company has a golden parachute.
Investing in gold seems to be having a surge at the moment. After an initial sell-off in late March 2020 – no doubt due to pandemic panic – gold has recovered and then some, with about $12 billion globally pouring into exchange-traded funds (ETFs) that have to do with physical gold. Gold prices are on an upward trajectory, too, trading at more than $US2,021 per ounce this month (August 2020).1 This is close to a 35% gain in the last 12 months. Why all the enthusiasm for gold?
Photo by Michael Steinberg from Pexels.
Why we love gold
There is a psychological reason for why so many of us turn to gold in times of trouble. As the coronavirus crisis continues to claim lives and affect economies, gold is reassuringly familiar. It is tangible. Unlike other kinds of investments which only exist on paper or online, gold is something you can visualize. It is also enduring; mankind has used gold in one form or another for centuries. It is mined and refined, extracted from deep within the earth and then turned into objects of value and beauty.
Additionally, gold has a reputation for being an effective hedge against inflation.
Should you join in the “gold rush” and invest in gold? And if so, how do you invest in gold?
Let’s start with the how first.
Best ways to invest in gold
If you’re picturing being the proud owner of stacks of gold bars or a bag of gleaming gold coins, that’s not the best way to go, according The Motley Fool’s Reuben Gregg Brewer. He points out that you may overpay for physical gold due to the dealer’s markup. Plus, you’ll have to arrange to store it in a bank safe deposit box or in a safe that you’ll have to buy.2 (Keeping it in your home without a safe is not a good idea!) If you do store it in a safe, you may still want to insure it, thereby incurring an additional cost. And when you want to sell that gold, you’ll have to lug it to a bank or a dealer in order to do so.
Gold you can hold in your hands is fine if you want something pretty and tactile, but not ideal as an investment that has the potential to help you grow your wealth.
A better option: purchasing gold ETFs or gold stocks.
Gold ETFs can be bought through a brokerage house. They are low cost vehicles that are also considered low risk, although – like any type of investment – they are not no risk. An ETF can help you diversify your portfolio because it consists of a collection of assets, one which tracks a particular index. ETFs generally have a low investment threshold, although the rising price of gold has raised that threshold to a degree (See my other blog post on index funds for more information).
One such example (this is not a recommendation) is the VanEck Vectors Gold Miners ETF (GDX), which seeks to replicate, as closely as possible, the price and yield performance of the NYSE Arca Gold Miners Index. The Index is intended to track the overall performance of companies involved in the gold mining industry.
As you can see from the snapshot below, GDX has had a return of 46.43% in the last 12 months.
Gold-related stocks from companies that mine or produce gold are another option. However, since they represent a single company rather than a number of them – as ETFs do – these stocks pose a greater risk to investors. Gold prices can be volatile due to production risks and costs involved in mining operations. Political instability in the areas in which mines are located can also affect stock price stability. If you are still keen to pursue individual gold stocks, it is important to do your up-front research. I would avoid speculative gold plays and instead, look for profitable, low cost gold producers that have established themselves as reliable businesses.
Is this a good time to invest in gold?
As noted earlier, gold prices are high right now. That means you will not necessarily be able to “buy low and sell high” – the ideal strategy for making money on investments. You may, because the price of gold could continue to soar, but there’s no way of predicting how long that will last. What is likely is that global uncertainty related to the pandemic and the effects of business shutdowns will continue to rattle the markets for some time.
As for gold offering investors protection against inflation, not all financial experts agree that that reputation is deserved. In a study published in the Financial Analysts Journal, authors Claude Erb and Campbell Harvey conclude that “gold should not be counted on as a safe haven in times of extreme stress” and hyperinflation, because it may not maintain its value.3
Wharton professor Jeremy Siegel’s popular book Stocks for the Long Run illustrates this point very effectively using historical data Siegel compiled. As depicted in the following graph, from 1802 to 2012, gold’s annualized return was only 0.7% and in fact $US1 would only have grown to $US4.52 in all that time.
Some advice for small investors
The coronavirus pandemic is, understandably, causing a great deal of fear – fear that is not likely to subside any time soon. Various pharmaceutical companies are working hard to develop vaccines; governments are implementing policies to contain the spread and most individuals are doing their part to keep themselves and their communities safe and healthy.
Nonetheless, the financial hit suffered by many countries has been substantial. Unemployment is at historically high levels. Many businesses are not expected to survive. Others will have to invest in expensive transformations in order to continue operating. All of these factors affect investors.
Fear and uncertainty are understandable at a time like this. Nonetheless, it is not wise to let emotion nor fear guide or impair your investment decisions. The great investor Warren Buffett is quoted as saying it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”4
If you are really drawn to gold as an investment, it’s best to allocate only a small percentage of your portfolio to it. Entering the “gold rush” at a time when the price is already high is not ideal.
Your PROFITABLE ACTION STEPS this time around:
- Set a reminder in your calendar to regularly check on your portfolio, so you can keep track of which stocks/funds are underperforming and which are increasing in value. Timely information will enable you to take an active role in managing your investments. That will help you grow your wealth.
- Do some of your own analysis on gold and become familiar with some of the more profitable gold producers in your country or region. Try a Google search like “profitable low-cost gold producers in XXXX 2020”.
- If you haven’t already, go to my home page and download my Passive Income Guide. It describes a number of ways to earn income with minimal ongoing effort (in most cases) and it’s ABSOLUTELY FREE.
Stay safe, healthy and wise and most importantly of all, take ACTION.
The next blog post will be: Crush debt in 2020.