The price of gold has been on a wild ride in recent years. Since escaping from its long-term “support” price of around US$1,700 in 2021, the beautiful metal has risen 168% in price (or 200% going by the 52-week high closing price of $5,247). Granted, the rally in the price of gold has been interrupted a few times. We’re actually in the midst of a minor correction right now, with gold futures down 10.8% from their 52-week high. Nevertheless, gold is in a major secular uptrend. It’s natural to ask whether the pullback we are now seeing is a buying opportunity.
Coming up with an answer to that question isn’t easy. Metals don’t produce cash flows, meaning that conventional discounted cash flow valuation methods don’t work for gold. With gold, value is a simple function of supply and demand. So, coming up with a specific “target price” for gold is tough. Nevertheless, the fact that central banks around the world – including those of China and Russia – are ramping up their gold purchases provides hope that demand will continue rising relative to supply. In light of this, allocating some of your portfolio to gold in this environment probably does make sense.
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How much of your money to allocate to gold
Once you’ve decided that you want to invest in gold, your next step is to determine what percentage of your money you’ll invest in it. Here, your guiding principle should be diversification. Gold is a massive asset, worth $32 trillion worldwide. However, global equities and bonds are worth $256 trillion combined. Therefore, an allocation of perhaps 10%–12% to gold would make sense in a globally diversified passive investment portfolio.
In which form should you own gold?
After deciding on your gold allocation, you need to determine in which form you should own gold. There are several options here. First, there is physical bullion. This leaves you with physical coin to store somewhere, which can be costly. On the flip side, this is the most useful type of gold in a “civilizational extinction” scenario. Next, there is gold futures. These essentially let you speculate on the price of gold without holding it. Finally, there is gold stocks, shares in gold miners that pay you dividends based on how much gold they extract and sell. Owing to their economic efficiencies, gold stocks are the most profitable gold-based assets to hold during bull markets.
An example of a Canadian gold stock that has done well
Given that stocks are among the best vehicles through which to own gold, the next question is “which gold stock should you buy?” There are countless choices out there, from dime a dozen Junior miners to established global companies.
For my money, one of the most legitimate and promising TSX gold stocks out there is Barrick Mining (TSX:ABX). Barrick is a Canadian mining firm that mines for both gold and copper. It is profitable enough to pay a dividend that yields 4.1% as of Tuesday’s market close. On a total return basis – that is, factoring in dividends as well as capital gains – the stock has gained 245% over the last 10 years, ahead of the TSX. And, in fundamental terms, the underlying company is thriving, with revenue and earnings up 31% and 140%, respectively, in the trailing 12-month period. Barrick Gold can do much more for you than what you’d get by stashing gold under your pillow. Its stock is very much an option worth considering.
