Home Kuo’s Smart Take Smart Thought Of The Week: Gold

Smart Thought Of The Week: Gold

There is a pretty good chance that gold could rise further, even though it has come off its all-time high. I set out some of the reasons why I think that it is still too early to write off the yellow metal just yet in this recent commentary on Channel News Asia.

But – and here is the big but – I won’t be buying any. I won’t be rushing out to fill my safe-deposit box with gold coins and gold ingots any time soon, or ever at all.

Thing is, just because something has been rising, and could even continue to climb to fresh highs, is not a good reason to jump on the gilded bandwagon. As investors, we need to be true to our principles.

One thing that I am not great at is speculating. What’s more, I am sceptical of those who claim that they are successful at doing so, sustainably. In fact, speculation is often most dangerous when it looks easiest.

Consequently, I will stick with investing.

Warren Buffett said:

“Investing is an activity of forecasting the yield on assets over the life of those assets. Speculation is the activity of forecasting the psychology of the market.”

With gold, it is impossible to work out its yield because it doesn’t have one. It pays us nothing for owning it. That is a problem….

…. Instead, its prevailing value is determined by the imbalance between supply and demand. The supply side is predictable at around 3,000 tonnes a year….

…. But demand for the precious metal can be affected by a range of factors that include jewellery manufacturing, which is also predictable, the value of the US dollar, interest rates, inflation, and fear. That last factor, namely, fear, has been an important driver of gold prices recently, given the uncertainty over the pandemic.

Don’t get me wrong – I am not fearless. But my fears cannot be assuaged by a bar of shiny metal. Instead, a diversified portfolio of good income producing shares can do a much better job of easing my concerns.

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Disclosure: David Kuo does not own shares in any of the companies mentioned.