So far, 2020 has been a good year for gold bulls. Year-to-date, the precious metal is up about 17%. Earlier in July, the price of gold passed the $1,800 mark to reach its highest level in almost a decade.
Recall that it hit a record of $1,900 in the fall of 2011. At the time of writing, it's trading at just above $1,813.
The performance of stocks is usually negatively correlated to gold. The commodity tends to do well when there is fear in equity markets. However, since March that relationship has not entirely held up. Following the coronavirus induced plunge, many stocks have also staged impressive run-ups in price after mostly hitting 52-week lows.
Yet as the Q2 earnings season gets underway, there may still be a case for gold for the rest of the year. If you agree with that analysis, there are several ways to include gold in your portfolio.
Gold Price Drivers
News headlines regarding a second wave of COVID-19 cases, especially in Asia, Latin America, and the US, are hitting the wires. Volatility has once again come back to broader markets. Given the pandemic's effect on health and economic conditions, investor sentiment could turn bearish, especially if risk appetite wanes during the upcoming earnings season.
Market participants have turned bullish on the precious metal in 2020 due to cheap money available worldwide. Many central banks, including the Federal Reserve, have further cut interest rates to ease the pain of economic uncertainty. Economists are nervous as more debt has been issued and more money created than at any other time in history. There tends to be a negative correlation between interest rates and gold.
Moreover, gold has a limited role in industry. So, unlike other commodities such as silver and platinum, it is not directly affected by a potential economic contraction.
How To Include Gold In A Portfolio
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 gold bullion is the most straightforward gold play global citizens tend to make. However, owning the physical commodity will also involve storage and insurance costs.
Another potentially less labor intensive option: exchange-traded funds (ETFs) that track the price of the commodity. Examples include the SPDR® Gold Shares (NYSE:GLD) or SPDR Gold MiniShares (NYSE:GLDM). Year-to-date, they are both up around 18.5%.
GLD's price move over the past year, and especially over the past several months, has been impressive. It's currently up 17.6% as of Friday's close, at $169.19.
From a technical perspective, the $170-level may act as resistance in the coming days and GLD could trade between $165 and $170. If the bulls have the upper hand, then $180 may well be the next target.
Gold Miners Also Deserve Attention
Owning some gold through miners is another way to stay ahead of the curve. With these gold stocks, the two potential drivers of investment returns would be higher gold prices and increases in miners' gold output.
Investors should look for companies with a strong asset base, experienced management, and a robust balance sheet. Names we like might include Barrick Gold (NYSE:GOLD), Franco-Nevada Corporation (NYSE:FNV) and Wheaton Precious Metals (NYSE:WPM). In 2020, they are all up—45.8%, 38.4% and 45.1% respectively.
Finally, there are funds that invest in various miners, such as the VanEck Vectors Gold Miners ETF (NYSE:GDX) or the VanEck Vectors Junior Gold Miners ETF (NYSE:GDXJ). Year-to-date, they are up 31.1% and 25.5% respectively.
Note that the bull run in GDX, which closed at $38.40 on Friday, resembles that of GLD. For GDX, the $40-level is likely to act as resistance and the $35-level as support.
Many gold mining stocks can turn around in a hurry as the sector is quite prone to boom and bust cycles. For that reason alone it's recommended to always stick to the golden rule of portfolio diversification.
Bottom Line
It's been a good year for gold and gold miner ETFs. With prices shooting higher, should long-term investors be buying today? We believe the rally in gold will likely push the price beyond $1,800 and even higher during the rest of the year. Therefore, even a modest exposure in a long-term portfolio may be appropriate.
As always, research your investments carefully and invest in assets and companies you believe have a long-term future.