Pessimism is sweeping across the markets like a flood over a small town. The “you know what” resulted in the ASX plunging by a whopping 33% in the past month. Consequently, creating a cliff edge which is causing our fundamentally strong stocks to be in free fall.
- Inverse ETF’s
- Purchasing fundamentally strong stocks at a discount (US and ASX examples)
- Purchasing extremely cheap penny stocks with the expectation to sell at a much higher price
- Riding the waves of trending stocks throughout the virus (Hand sanitiser stocks, toilet paper stocks, COVID-19 vaccine companies)
- Investing in Gold
To we are discussing why people invest in gold, how you can get in on the action and whether gold is worth the investment?
Why do people invest in Gold?
- Store of Value
Gold, while being stored, retains its purchasing power so that in the future an investor could sell the metal at a higher price.
The storage component of gold is extremely attractive to investors. Why? Because investors can use gold to hedge against inflation. Essentially, inflation depreciates the value of a country’s currency. Thus, storing gold mitigates the effects of inflation on your money.
According to Claude Erb and Campbell Harvey from National (England) Bureau of Economic Research “the storage of gold does not seem to be a good hedge of realized or unexpected short-run inflation”. Instead, gold may very well be a long run-inflation hedge. However, the long run-run may be longer than an investor’s life span” (The Golden Dilemma).
Thus, investing in gold may be a lifetime investment instead of a short term decision.
2. Safe Haven
Gold is a haven because of its negative/very low correlation to the market. Meaning gold will perform strongly when the market is not. Erb and Harvey found that “83% of times that stock returns were negative gold returns were positive” – The Golden Dilemma.
Thus, Gold allows you to park and protect your money during poor financial times and then jump back into the market once the dust settles.
Investing in gold can diversify your portfolio. In turn, allowing you to generate returns with less risk.
How to get in on the action
- Bullion (Bar Format) = such as a mint.
- Gold Mutual Funds (ETF’s).
- Newcrest Mining Ltd (ASX: NCM)
- BetaShares Gold Bullion ETF (ASX: QAU)
- ETFS Physical Gold ETF (ASX: GOLD)
3. Derivatives – futures.
4. Purchase the stock of a gold producer.
Is Gold really worth the investment during the coronavirus?
Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
Gold is championed as a stable asset. Concerning, the current market downturn, stability in your portfolio should be a high priority. Thus, there is logic in using gold as a safe place to store, and possibly increase, your money until the market corrects itself.
Furthermore, Gold will decrease when the market corrects itself. Allowing investors to obtain gold at a cheaper price. In turn, setting up a long-life investment.
Also, fear causes investors to flock to the haven and thus drive up Gold. The unprecedented fear is causing governments and central banks to use emergency measures. Such as stimulus packages and rate cuts.
However, such measures would drive up government debt and devalue the worlds currencies. Creating more fear and more demand for Gold. Thus, making gold and gold stocks possibly a great investment and an inoculation to the coronavirus.
Despite the pro’s, we must discuss the negatives (risks). Why? Because YIG believes investors need a balanced perspective on Gold to make a wise investment decision.
Gold is extremely speculative. Because, you are betting based on what someone else will pay for the commodity in 1,3 or even 6 months. With the markets bouncing up and down like a kid in a jumping castle predicting future gold prices becomes a dangerous game. Because who is to say the market doesn’t correct itself in two weeks?
Moreover, gold is not a cash flow producing asset. In the words of Warren Buffet “you can fondle, you can caress, and you can rub your gold but in a hundred years you still just have an ounce of gold”. Meaning, gold’s real value is only what people are willing to pay for it. Which is constantly changing.
Also, gold is mainly a protective asset. During the current market downturn, I believe there are better investments available.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Patrick McLoughlin, Associate of YIG.