2020 has been a good year for gold miners and investors. The price of the precious metal has been rising nicely. It’s likely that the desire for “safe assets” may last a while longer as stock markets plunge, pushing the price of gold up even further. But does that mean you should invest in gold? I’d suggest not.
What’s happened
The FTSE 100 crashed over 7% yesterday. The cause was a breakdown in relations between Saudi Arabia and Russia which now means oil production is going to massively increase. Supply and demand economics tell us that means the oil price will plummet. This hits the FTSE 100 particularly hard given the size of companies such as BP and Royal Dutch Shell.
The FTSE 100 was below the 6,000 mark in 206, so we’re hardly in unprecedented territory. Instead, it’s the speed of the fall that is seemingly making investors, and central bankers, quake in their boots. Just a month ago the FTSE 100 was trading above 7,500, showing the severity of the slump.
What happens next is unclear. UK shares may well fall further, but it’s how investors react to what is unfolding that will determine whether they profit or makes losses.
How to react
I’d suggest not following other investors into gold, or even other supposedly safe-haven assets. Instead, I believe it’s better to keep cash aside for investing in shares when the market does recover. At some point it will.
Investors right now are reacting emotionally to uncertainty. That’s what happens in the short term, but in the long term markets tend to go up and bounce back strongly from slumps like this. It’ll happen again. As soon as it does, I recommend jumping in and buying shares at much lower valuations than just a month ago.
High-quality companies are now having their share prices dragged down, sometimes for no reason other than fear. Examples of this can be seen in Experian, whose share price is down 12% in the last month. Even National Grid,a very defensive company operating in the UK and the US is down 5% over the same timeframe.
And when others are fearful, legendary investor Warren Buffett advises long-term investors to be greedy. The only caveat I’d add is that it may be best to wait before tucking in.
Investors who bought into shares shortly after the financial crisis would still be sitting on very healthy profits today, even excluding over a decade’s worth of often growing dividends. This latest crisis will likely create a golden buying opportunity for long-term investors.
The ones that did best wouldn’t have invested in bars of gold, which pay no dividend and can’t easily be traded. The biggest profits to be had came from spotting the right time to invest and then buying up shares in profit-making, dividend-paying companies.