Gold prices are now down 10% since 6 August. Is this a buying opportunity for gold, miners, or ETFs for portfolio diversification?
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While all eyes have been on the S&P/ASX 200 Index (ASX: XJO) and its near-5% slide over the past month, another asset has been slipping too. The gold price has accompanied the ASX 200 on the downwards slope, falling close to 10% in value since reaching a new record high of US$2,161 an ounce back in early August. Today (at the time of writing), gold is asking just US$1,857 an ounce. That’s even below the US$1,921 level, which was the 9-year all-time high that gold breached earlier this year.
Predictably with this move, ASX gold miners and exchange-traded funds (ETFs) have been feeling the pain. The share price of the ASX’s largest gold miner Newcrest Mining Limited (ASX: NCM) is down 17% since early August. Other mid-tier producers like Evolution Mining Ltd (ASX: EVN) and Northern Star Resources Ltd (ASX: NST) are also down – 11.15% and 19.15% respectively – over the same period. The VanEck Vectors Gold Miners ETF (ASX: GDX) is down 14.96% since 6 August, while the pure gold play ETFS Physical Gold ETF (ASX: GOLD) is down 7.3%.
So is this a buying opportunity for the yellow metal?
An auric opportunity for gold?
It has been interesting to see this precious metal fall so handily at the same time as the share market. Gold is normally viewed as a ‘safe haven’ asset. That means it should theoretically move conversely to ‘growth assets’ like shares. But that logic has always been very flexible anyway, so don’t take too much from it.
So, if you’re interested in owning gold, ask yourself why do investors traditionally own this asset? The conventional reasons range from ‘inflation hedge’ to ‘protection against a share market crash’ or for the more pessimistic investors out there: ‘a hedge against the system collapsing’.
All of these reasons have fairly strong historical backing but are not immune from the odd hole. Regardless, I do think there are strong arguments for a gold case in 2020, especially after this pullback. The biggest drawcard the yellow metal has right now (for me anyway) is its scarcity. Gold can’t be printed or issued, it can only be mined. We’re increasingly living in a world of financial engineering. What central banks around the world are doing right now is truly unprecedented. Never before has the United States had the levels of debt it does today. And never before has the US Federal Reserve had more than US$7 trillion in assets on its balance sheet.
Now it’s possible that all of these factors don’t amount to much in the future. But again, I don’t think we can say it won’t. With numbers of this scale, future inflation, future deflation and a loss of ‘reserve currency status’ are all possibilities for the US dollar. And a precious metal is a good asset to own in all of these scenarios.
I look at gold as more of an insurance policy than anything else. It is a valuable asset that can give your portfolio some diversification and balance. But it’s also an unproductive asset offering no yield, as Warren Buffett often says. If you’re willing to accept these parameters and are looking to add a bit of gold to your portfolio (whether it be physical gold, an ETF or a gold miner), then I think today is a good time to do it.
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Motley Fool contributor Sebastian Bowen owns shares of Newcrest Mining Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.