Market volatility continues. And investors are once again wondering if their portfolio holdings may take a hit later in the year. But one segment that has been notably outperforming others is gold stocks.
Rallying physical gold prices have helped fuel the upward climb in gold miners so far this year.
The performance of broader indices is usually negatively correlated to the price of gold, which tends to do well when there is fear in equity markets.
Do you also think there is a case to be made for gold now? Then there are several ways you can include gold or gold stocks in your portfolio. Let’s take a closer look.
Should You Be a Gold Bull?
A tug-of-war between bulls and bears is raging in equity markets. I’m in the camp that believes share prices are likely to remain volatile for the rest of the year. And I expect main stock indices to once again swing lower in the coming weeks. That could be good for the price of gold, which is usually regarded as a safe haven.
Gold recently hit a high for 2020 and the spot price is up over 13% year-to-date, hovering around $1,730 per ounce. Our readers may remember that it had hit an all-time record of $1,900 in September 2011.
The other reason I am bullish on the precious metal in 2020 is the cheap money that is globally available. Many central banks, including the Federal Reserve, cut interest rates further to help avoid a hard economic landing. There tends to be a negative correlation between gold and interest rates.
As nations take on debt at unprecedented rates, economists are concerned that inflation might show its ugly head in months to come. Then, the price of gold could also increase with it.
Furthermore, gold has a limited role in industry. So, unlike other commodities such as silver and platinum, it is not affected by a potential economic contraction. Many analysts concur that various national containment measures as well as the uncertainty regarding the future of the global economy may lead to an economic slowdown.
Portfolio Considerations With Gold Stocks
Personal financial planners usually recommend a 5% to 10% allocation of a personal investment portfolio to gold as an insurance policy. Investing in the physical asset is one option. Buying the gold bullion is the most straightforward gold play global citizens tend to make. When gold prices rise, so too do the value of their holdings. It’s that simple.
In the U.S., you can buy the precious metal (as bar or coin) through various brokers that may, for example, advertise their services online. A range of reputable brokers may also give investors to store their purchases with them in a vault.
Gold Miners Are in Play
Another way to participate in a potential rally may be to invest is through gold mining stocks. With these gold stocks, the two potential drivers of investment returns would be an increase in the price of gold price increases and increases in miners’ gold output.
Which mining shares could be worth backing now? I’d encourage investors to look for companies with a strong asset base, experienced management, and a robust balance sheet.
InvestorPlace’s Josh Enomoto has a regularly updated article on nine gold stocks to buy. So far in 2020, their returns have been:
- Barrick Gold (NYSE:GOLD): up about 41.5%
- Agnico Eagle Mines (NYSE:AEM): up about 6.5%
- Wheaton Precious Metals (NYSE:WPM): up about 50.2%
- Sibanye Stillwater (NYSE:SBSW): down about 20.9%
- Coeur Mining (NYSE:CDE): down about 31.8%
- Hecla Mining (NYSE:HL): down about 1%
- Americas Gold and Silver (NYSEMKT:USAS): down about 18.6%
- Great Bear Resources (OTCMKTS:GTBAF): up about 29.1%
- Revival Gold (OTCMKTS:RVLGF): up about 20.9%
In addition to the names above, I am also paying attention to Agnico Eagle Mines (NYSE:AEM), Franco-Nevada Corp (NYSE:FNV) and Newmont Corporation (NYSE:NEM). In 2020, they are all up 6.5%, 42.6% and 45.1% respectively.
It is important to remember that when a company owns a mine, it also owns all of the gold stored within it. However, there may be geopolitical risks regarding the country where the mine is located. Therefore, further due diligence regarding geopolitical risks may be required.
Investors should also note that most gold stocks are in general low dividend-payers. So they may not be appropriate for passive income investing.
Many gold mining stocks can turn around in a hurry. Put another way, the sector is prone to boom and bust cycles. Therefore, I would always stick to the golden rule of portfolio diversification.
Finally, there are investment funds that invest in various miners, such as thee VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) or the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). Year-to-date, they are up 21.4% and 9.8% respectively.
How About Leveraged ETFs?
InvestorPlace readers may also wonder about the suitability of leveraged exchange traded funds (LTEFs) in investment portfolios. Todd Shriber has recently written in detail about two of these LTEFs. Direxion Daily Jr. Gold Miners Bull 2X ETF (NYSEARCA:JNUG) and Direxion Daily Gold Miners Bull 2X ETF (NYSEARCA:NUGT).
Before you decide to buy leveraged ETFs, it’d be extremely important to understand how they work, with an emphasis on their drawbacks. The use of leverage as well as volatility gives their unique properties to these funds.
As you increase your knowledge base on these leveraged exchange-traded funds, you may quickly realize that LETFs are likely to be more appropriate for professional traders for hedging purposes than buy-and-hold retail investors.
Investor Takeaway on Gold Stocks
All asset classes have their advantages and disadvantages. In addition to the bullion, many robust gold miners have also done well over the past year. And the trend may well carry in the second half of 2020.
With prices shooting up, should investors be buying today? I believe the rally in gold will likely push the price over $1,750 or even higher in the rest of the year. Therefore even a modest exposure in a long-term portfolio may be appropriate.
However, your guess as to where the precious commodity, and the companies that mine it, go in the rest of the year is as good as mine. As always, research your investments carefully and invest in assets and companies you really believe have a long-term future.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she had covered calls on NEM (May 29 expiry).