Recently Frank Holmes of U.S. Global Investors talked about how he is bullish on gold and sees a lot of growth with the commodity. For the year, gold is trading up 8% and Mr. Holmes sees it going even higher. But will it?
There is a lot happening in the U.S. economy and globally and all of this has an impact on the price of gold. Below I’ll get into the factors that affect gold and see if gold should be on your list to add to your portfolio.
Bullish On Gold? How Gold Prices Are Affected
To understand how gold historically trades, you have to understand the stock market as a whole. Stocks rise when the economy is growing. Investors want to take part in this growth by investing in companies that are making money from the growth of the economy.
Bonds on the other hand typically perform well when the economy is in recession. Investors want to hedge or protect their money, so they invest in something stable, like bonds. After all, if the economy isn’t growing, then companies aren’t growing either.
Gold falls close to the bond side of things. People invest in gold based on fear. Investors see gold as a safe haven to protect their money. They also see it as an inflation hedge.
Look at a chart from 2010 and you will see this in action. Gold prices were relatively flat up until the stock market collapse in 2008. Then gold spiked until 2013. Investors saw the U.S. economy improving and fled gold for stocks.
Since 2014, gold has been relatively flat, trading in a narrow range. So why bullish on gold now?
There are two reasons according to Mr. Holmes. First is the opposite of the fear factor. It’s the love factor. The economies in China and India are growing and as more people grow their wealth, they will have disposable income. They will spend their money in things they want, such as gold jewelry. This will lead to higher demand, which eventually leads to increased prices.
The second reason is low interest rates are good for gold. While the Federal Reserve is committed to raising interest rates this year, Mr. Holmes doubts that President Trump will be able to implement his infrastructure spending plan. When this happens, growth will slow and interest rates will need to stay low to keep the economy moving along.
Should You Be Bullish On Gold?
Should you be bullish on gold? I’m not as excited about gold as Mr. Holmes. But then again, I don’t take chances on commodities just to try to make money. I use commodities and gold in particular as part of my overall portfolio.
This allows me to hedge my losses should stocks drop. But because of the volatility of gold and commodities, I keep my exposure to them small. Ideally no more than 10% of my portfolio.
However, if you want to take an aggressive position in gold, here are some ways to do it.
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Where To Invest In If Bullish On Gold?
Traditionally, there are 3 ways to invest in gold:
- Physical: this means buying gold jewelry, coins and bars
- Miners: this means buying stock in the companies that mine for gold
- Exchange Traded Funds: these investments let you invest in either gold miners, futures contracts or invest in gold without physically owning it
Since we talk about stocks and investing here, I’ll skip over how to physically buy gold and instead highlight some stocks and ETFs worth looking at.
SPDR Gold Trust (NYSE: GLD) – This ETF holds physical gold bars. They only sell when needed to pay for fund expenses.
iShares Gold Trust (NYSE: IAU) – As with GLD above, this ETF invests in physical gold, making it a low cost alternative to buying physical gold yourself.
Van Eck Gold Miners ETF (NYSE: GDX) – This ETF focuses on gold miners as a whole. So instead of buying one mining stock, you get a piece of the action in all of the big players.
Van Eck Junior Gold Miners ETF (NYSE: GDXJ) – Like the Van Eck Gold Miners ETF above, this ETF also focuses on gold miners as a whole. The difference is that this ETF invests in small cap miners. Just like with stocks, the smaller the firm, the greater the potential growth.
Goldcorp Inc (NYSE: GG) – Another top pick, this is the largest gold miner in the world. They recently worked on reducing costs and have struck deals with other miners which should lead to nice growth in the coming years.
Barrick Gold Corp (NYSE: ABX) – this miner is well positioned for future growth. They took the time and steps needed to cut their operating costs so that every ounce of gold they mine is more profitable.
Mr. Holmes makes a strong case for investing in gold. If you feel that gold is a smart move, then you should consider adding it to your portfolio. But if you are unsure, you should take a more conservative approach. Invest in one of the ETFs listed above and make it part of your overall portfolio to hedge against pull backs in the market.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.