Wall Street is jittery right now as Trump really looks like he wants to launch a trade war, and the gold bugs come out when things look jittery. Gold is a stable source of value, they say. People have used it for thousands of years. It is a good investment when the inevitable bear market hits.
It is true that gold generally performs better during a bear market, and a bear market appears far more likely now than it did at the beginning of the year. But even then, investing directly in gold is not a good idea. There are ways to take advantage of an increased interest in gold that are safer and will earn more over the long run.
From a certain perspective, the very idea of “investing” in gold is bizarre. When you invest in a company, you give them money to get a cash flow which will increase your wealth in the long run. A rudimentary example is that 500 years ago, you might invest in a merchant ship in the hopes of it returning and giving you a share of its silks and spices. Today, you would get a dividend from any company you invest in.
But if you buy a bar of gold today, you have that same bar of gold five year from now. That bar of gold might be worth less or more depending on the circumstances, but you are hoping that others will pay more for that bar instead of receiving something more than when you started. That is why gold is just as much speculation as it is an investment.
Because gold is speculative, it is far more volatile. As a very basic example, look at a chart showing the price of gold over the past year, which is currently at around $1,325. Now compare that chart to the stock chart of any other major company, whether Ford Motor Company (NYSE:F) or McDonald’s Corporation (NYSE:MCD) or Microsoft (NASDAQ:MSFT). You should notice that gold’s value bounces up and down far more.
The risks in speculating gold only further increase if you decide to invest in physical bullion or gold coins as opposed to going for IRA investing. You have to spend extra to insure and store any physical items which cuts into potential profits, and the profits for selling gold are taxed more heavily than a capital gains tax. Buying physical gold also attracts scammers who try to sell you some super rare coin whose value will definitely go up and make you rich. Buying bullion is risky, but you should never buy gold or silver coins.
Everything listed above should make it clear that investing in gold, especially buying gold bullion directly, is not a good idea. Instead of joining a gold rush, investors should instead invest in the man selling shovels – or to be more specific, the company mining gold.
Companies like Alamos Gold Inc (TO:AGI) are unquestionably a better investment as they represent a real productive investment which will continue to mine more gold over time. But even a mining company carries problems, as mining is an expensive and time-consuming process which carries significant risk.
Mining companies frequently have to work with streamers, which are companies which finance mining operations in exchange for a share of the mines. Streaming companies can invest in a wide range of mines, which grants them more diversification compared to mining companies which only work on a few mines. Major streaming companies include Franco-Nevada Corporation (TO:FNV) or Royal Gold Inc (NASDAQ:RGLD), and these companies are generally better investments than buying gold directly. Other options include investing in gold futures or a gold ETF.
Note that all of this assumes that the price of gold goes up in the near future, and there is no guarantee that will be the case despite the current jitters in the market. Gold should have risen significantly compared to January 1 as the Federal Reserve indicated that it was going to raise interest rates and was more concerned about inflation. But the value has stayed roughly the same.
There are reasons to think that the gold price will enter a bull market in the near future. Rising commodity prices, fueled by increased consumption in China, is a good sign as gold does have some industrial uses. The recent Italian election results, as well as the upcoming annual Indian Gudi Padwa which see Indians buy gold in mass, could start to push gold up as markets turn jittery. That would fuel investor interest in gold, which would further unnerve the markets, and be the beginnings of a bull market.
But that is only one possible scenario, and gold over the long term is a volatile and risky investment even under the current circumstances. There are better ways to take advantage of an upcoming bear market or keeping your money safe, and investing in gold miners or streamers remains a better investment compared to buying gold directly.
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