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As gold reaches record highs, is bullion still a good investment?

10 July 2020 Adrian Saville, Chief Executive at Cannon Asset Managers

The gold price soared this week, hitting a nine-year high of $1818/oz on Wednesday, and although it is currently off its recent peak, it remains in elevated territory, near to its all-time record close of $1898/oz achieved in 2011.

But investors need to be careful with gold – it’s an asset that some investors are fanatical about, which is always a dangerous attribute. Gold is a psychological safe haven, and has little industrial application. This means that its price is driven by behaviour rather than by the fundamentals of supply and demand.

This said, physical gold (not gold mines) offers excellent portfolio insurance. In an end-of-the-world scenario, gold could go from $2,000/oz to $20,000/oz. This makes gold an intrinsically valuable asset for times of crisis and fear.

For this reason, Cannon Asset Managers favours gold as a permanent – albeit small – component in portfolios. We currently favour gold miner Pan African Resources, a fantastic business which on average brings gold to the surface at a cash cost of about $950 an ounce. In the current circumstance, with gold above $1,800 an ounce, multiplied by R17/$, this business is doing exceptionally well.

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