Gold is an interesting asset class to think about for a portfolio. Does it make sense to buy gold? In this article I’m going to share some of my own thoughts on it.
Why consider gold?
A better store of wealth than cash(?)
Gold has been a store of wealth for thousands of years. People used to use gold coins to pay for things. In recent history gold has been used as an alternative asset that’s seen as defensive and could be used as a way to diversify away from currency.
The US dollar, Australian dollar or any other man-made currency could be devalued through money printing and inflation. But gold has kept growing with inflation over the decades (and centuries). The idea is that owning gold should mean the value of your wealth (in cash) doesn’t simply get inflated away. In that sense, gold sounds like a good inflation hedge. However, it’s not like you can go to your local supermarket and pay for food in gold – you would need to convert it back to your local currency to buy items. Not very practical.
How about as an investment?
The potential benefit of gold starts dropping away when you compare it to shares, or perhaps property. It’s true that the capital value of gold can rise over time. But it doesn’t make annual profit like a business or rental property does. Gold just sits there. It may be shiny, but there is no compounding growth available. With businesses, they can make profit and re-invest for more growth. And those businesses can pay out some of the dividends each year as profit. Gold does none of that.
There are many different ways to invest in gold such as VanEck Vectors Gold Miners ETF (ASX: GDX). You could go out and (somehow) find a gold bar for you to physically buy and own yourself. If I had to pick one way to invest in gold, it’d probably be through ASX gold miners because they have the ability to make profits and pay dividends, whilst also benefiting from a rising gold price.
However, gold miners face all the usual mining risks just like any other resource business. And don’t forget, gold prices can go down as well as up. That store of wealth could turn into a detractor of wealth. The gold price fell quite heavily between 2012 and 2016.
I think the best way to defend against recessions or inflation is to invest in quality, defensive ASX dividend shares like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
