Should Investors Buy Gold?

With record-low interest rates and all the government money that is being pumped into economies today, many investors have been seeking out assets that hold their value over time. Cash clearly isn’t one of them.

Granted, I prefer stocks as a long-term investment but is there merit in considering adding exposure to the “yellow metal” (aka gold) to your portfolio?

The spot price of gold has risen around 15% so far in 2020, to hit US$1,740 per ounce. That’s the highest it has been since the end of 2012.

Why the gains?

Gold has been a very divisive topic within investing. It’s usually split between those bears who believe it’s intrinsically worth nothing (you can’t value it) and those “goldbugs” who are extremely bullish on the yellow metal as a viable hedge against inflation.

I think that the truth probably lies somewhere in between, at least in the new normal investors find themselves in.

According to the Center for Strategic & International Studies, G20 countries have provided fiscal support in the region of a whopping US$6.3 trillion to combat the economic fallout from Covid-19.  Out of this, over a third comes from the US where US$2.3 trillion is being spent.

Clearly, this has investors worried about the potential economic repurcussions of such a large stimulus. The first thought after a stimulus of this size would be that rapid inflation would naturally follow.

However, many economists have pointed out that complete “demand destruction” (i.e. nobody is going out to eat, shop or travel) means that inflation will likely remain tempered in the near term.

What does gold give you?

Any exposure to gold is traditionally thought to provide a level of protection to portfolios that are mainly in equities.

What’s more, investors buy it as protection against any surge in inflation given it holds its value and there is a finite amount of it in the ground (unlike cash, which can be printed whenever central banks feel like it).

True to form, gold‘s spot price saw a resurgence in buying during the Global Financial Crisis and hit its 2012 peak before steadily falling.

It was no coincidence that this coincided with the early stages of a 10-year bull run in US stock markets. Once investors realised that the much-feared inflation never actually materialised – after massive QE from the Federal Reserve – the gold price started to fall at the end of 2012.

The best way to play gold

Ironically, perhaps the best way to invest in gold is to buy an exchange-traded fund (ETF) that tracks the underlying spot price of gold.

Two of the best ETFs to get fast and easy exposure to gold are the SPDR Gold Trust (NYSE: GLD) and iShares Gold Trust (NYSE: IAU).

Both do a similar job in that they actually own the gold bullion required to value the shares rather than investing directly in gold miners.

SPDR is the bigger (and older) of the two and provides more liquidity for investors whereas the iShares ETF is smaller but has a lower expense ratio. Both have done a good job of tracking the price of gold over the years.

Foolish takeaway

Conventional wisdom suggests that holding a small amount of gold is always wise. What the percentage of your portfolio should be in gold is generally thought to be 5% or under.

Some exposure to gold arguably provides liquidity and a defensive hedge when markets go south. Having said that, the opportunity cost of owning too much gold is clearly huge over the long term versus stocks. That’s something investors should keep in mind.