Worries over war, supply chains and a pandemic with a history of waxing and waning can create a swarm of goldbugs.
Seeing the shiny metal as a stalwart investment in economically uncertain times, some investors think they can weather storms with physical gold, gold exchange-traded funds or shares of companies in the business of mining gold. Others hold that, in a true economic catastrophe, food and fuel would be more valuable than a precious metal.
The value investing viewpoint of gold as part of a portfolio should be performance-based. What is the financial footing of companies involved?
Goldbugs may see gold investments as having intrinsic value just because of the commodity involved, but there are risks involved in buying gold. Value investing guru Warren Buffett (Trades, Portfolio) has said he thinks stocks are a much better purchase than gold, and his investment choices have backed that up.
Gold hasn’t backed the U.S. dollar since the Nixon years, a time of rising inflation. Gold prices were on the rise back then, and generally gold will go up in price when the dollar is weak because investors are looking for dollar alternatives. Also, since gold is priced in dollars, a weaker dollar makes gold more attractive for investors who hold other currencies.
Gold for value investors
Value investors look at profits, pure and simple. When it comes to gold, it can be up or down, with speculation and other market factors playing a role. Investors stand to make a larger profit with stocks than with gold, although gold can have its up years.
Despite his earlier stances against gold investing, Buffett did purchase gold in 2020, a troubled year that likely sent panicky investors toward the precious metal. By the fourth quarter of 2020, though, he divested himself of gold investments.
Those value investors who read today’s headlines and want to hedge stock performance by buying gold can consider these options.
Physical gold
Physical gold has traditionally been a hedge against inflation, but you’re not guaranteed a rise in value for the coins or bullion you bought. Also, coins and bullion are usually purchased at a premium and sold at a discount, so that can make it more difficult to sell gold for a profit.
Value investors who want to own physical gold should keep it to a small part of their portfolios to reduce volatility.
Gold mining companies
Usually gold mining companies’ stock prices will rise and fall with the price of gold, but because these are corporations that pay dividends, they often provide a higher return on investment than physical gold.
Still, value investors should look at these companies as they would any other corporation. Are these companies profitable now? What is the likelihood of them being profitable in the future? Is there a better option for your funds?
Gold ETFs
If you’ve been bitten by the goldbug, opt for gold stocks that pay dividends. Another option is a gold mining exchange-traded fund, such as VanEck Gold Miners ETF (GDX, Financial) or VanEck Junior Gold Miners ETF (GDXJ, Financial), which focuses on small-cap gold mining stocks. These ETFs hold a selection of mining companies for greater diversity.
Gold ETFs, in contrast, track the price of gold. The SPDR Gold Trust (GLD, Financial), for example, tracks the LBMA gold price. Speculation rules the gold-based ETFs, while the ones that hold shares of mining companies have stronger profit potential.
Gold jewelry
Gold rings, watches, necklaces and earrings are a joy to own and wear, but don’t think of these as investment items or hedges against inflation.
Other options
Value investors who want the best chance of earning gold, as in profits, should consider asset diversification as their protection against inflation. Investing in sectors such as energy, utilities or consumer products, all products that will still see high demand, even in troubled times, could be a golden opportunity.
