Gold has done well in recent times given the 20% price rise in the yellow metal. It's also true that a truly diversified portfolio should include some gold or at least something gold like. But that store of solid value isn't there as an investment, it's there as security against the entire investment market going sour.
The issue here is also not about the price of gold. It's about which instrument we should be using to latch onto changes in the price of gold. This is also at a pretty theoretical level - we are not about to recommend a particular stock or ETF which should be used. Instead this is about the basic considerations.
Gold itself is likely to retain some value if the rest of the financial system - even civilization itself- crumbles into the dust. But then so is a shotgun and a case of cannde beans. The important thing about all of those being that we'd need to have physical possession of the item in question.
The gold price is also affected by such things as interest rates (higher usually means a lower gold price), inflation (higher should, in theory, mean gold tracks higher in nominal dollars) and so on. So there are reasons why we might want exposure to the gold price even if not to an ingot buried out behind the outhouse.
But which is the best way to gain exposure to that gold price? If we invest in the metal itself then we gain no income. That's an opportunity cost of holding a commodity or precious metal of course. However if we invest in profitable gold mines then we will gain an income. So, there's that.
But more importantly gold miners - or the shares in them - are leveraged to that gold price. The cost of mining gold does not change when the price of gold does. So, rises in the gold price feed through directly to the bottom line - the profits - of the mine. The same is true of a falling gold price. The hange in the gold price shows up directly in the profit line of the mining company. Given that the share price is the net present value of all future income this means leverage.
So, in a bull market gold shares rise more than the gold price. In a bear fall more. That's the leverage. That is, if we're investing on something other than the cannde beans basis then we should rationally prefer to be in the gold mining stocks rather than gold itself.
One last point, which is that investing into a single mine company then exposes us to hte geology of that mine. Something we might not be all that happy about on a risk basis. Thus the advantage of being in a gold shares ETF for example - a retention of the gold price risk but a spreading of the geology one.
Gold isn't rally an investment but gold shares are.
