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Read this before you invest in ASX gold shares

Gold bar in front of gold price chart
Image source: Getty Images

On Wednesday I penned an article warning you not to get caught up in the gold fever sweeping through global investment markets. 

Rather than invest in historically volatile gold shares, I recommended you consider adding some healthy dividend shares to your portfolio. As a long-term investor, you’ll almost certainly find better value there over time, in my opinion.

There are a good number of quality income shares listed on the All Ordinaries (INDEXASX: XAO). Many have reduced or suspended their most recent dividend payments due to the economic fallout from COVID-19. But that’s a short-term issue. Once the economy regains traction, and it will, the dividends should flow again.

I specifically pointed to Collins Foods Ltd (ASX: CKF) as a yield stock you might want to look into further. In trading today, the Collins Foods share price is $9.53 per share. That’s right around where it was mid-day Wednesday.

But that’s fine. Unless you’re day trading — in which case, I hope you have a good supply of antacids — you shouldn’t get overly caught up in the daily price swings. Instead, look for quality shares with a track record of regular and growing dividend payments. And consider adding to your holdings when the share price falls for non-company specific reasons.

Some eye-popping gains fuelling FOMO

With that said, the fear of missing out (FOMO) can be a powerful driver.

When your friends are talking about the 80% gains they’ve made from Aussie gold miner Silver Lake Resources Limited (ASX: SLR) since the start of 2020, it’s easy to take your eyes off your 20 to 30 year investment horizon and want a ‘piece of the action’.

And Silver Lake isn’t alone. Saracen Mineral Holdings Limited (ASX: SAR) has seen its share price rocket 78% year-to-date. And the Evolution Mining Ltd (ASX: EVN) share price is up 58%.

Ironically, the same virus that’s dragging on many companies’ share prices is helping fuel gold’s rise, and supporting the companies that dig it up. In times of uncertainty, investors historically flock to haven assets like gold. And the insecurities thrown up by the coronavirus have seen the yellow metal reach record highs in US dollars. It’s currently worth US$1965 per troy ounce at the time of writing.

Which brings me to an important point…

We don’t use the greenback in Australia

Gold is right near its record highs in US dollars. But we don’t get paid in US dollars here in Oz. And we can’t spend them.

The US looks set for a period of inflation, while the Australian Bureau of Statistics just reported the Consumer Price Index (CPI) fell 1.9% in the June 2020 quarter. Australia’s annual inflation rate fell to -0.3% (or +0.3% deflation) for the year through the end of June

This is clearly visible in the exchange rate between the 2 currencies. On 20 March, 1 Aussie dollar only fetched 57 US cents. Today it’s worth 72 US cents.

You can see the same trend playing out in the gold price. Year-to-date, the gold price in US dollars is up 29.2% while in Aussie dollars it’s up a more subdued 25.8%. Still a big gain, but something to keep in mind when you hear the gold price quoted.

Should you buy ASX gold shares?

If you want to take a punt on a specific gold miner, best of luck. As we saw above, some miners have returned fantastic gains so far this year. Just don’t invest more than you can afford to lose.

If you’re looking for exposure to a wide range of gold shares with a single investment, you may want to look into the ASX-listed VanEck Gold Miners ETF (ASX: GDX).

The VanEck Gold Miners ETF holds a basket of diversified companies involved in the gold mining sector. Management costs run 0.53% per year.

According to the company website, the fund “provides exposure to publicly traded companies worldwide involved primarily in gold mining, representing a diversified blend of small-, mid- and large-capitalisation stocks.”

As at 30 June, the fund’s top 3 country weightings are 54% to Canada, 18% to the US, with Australia coming in at number 3 with 15% weighting.

Year to date, the VanEck Gold Miners ETF share price has gained 38.8%.

Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now

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In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

*Returns as of 6/8/2020

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Collins Foods Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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