Analysts Say: Invest in Gold

Analysts suggest that gold’s strong performance over the last 18 months, as it closes in on $1 600/oz, isn’t likely to halt in the near future. This is spurring increased interest in the range of investment products available to those interested in investing in gold.

Owing to its global appeal, gold is usually a safe investment choice in times of increased stock market risk. In fact, it typically performs well during periods of market uncertainty, as a safe haven investment.

In 2020, a host of factors, including the unresolved U.S./China trade dispute, threat of a global recession, and the uncertainty surrounding the 2020 presidential election in the U.S, could cause the gold price to further strengthen.

Longer-term concerns, such as a declining US dollar and rising inflation, are also driving gold’s strengthening position as a hedge asset. (As gold is quoted in  US dollar, a weakening dollar means the price of gold becomes more affordable  for investors holding other currencies.)

For many experts, the global stock market of January 2020 looks a lot like early 1999, which preceded a price increase of over 400% for the yellow metal over the next decade.

Potential investors in gold have a variety of investment products available to them, from physical gold and derivative instrument to gold mining stocks. You should build your gold investment portfolio according to your particular investment objectives, as each avenue has its own features and benefits.

 

Here is a guide to investing in gold.

The importance of gold

No metal has as colourful history as gold. While gold no longer backs the world’s currencies (the gold standard), it still plays an important part in our modern world and economy.

Approximately 50% of gold demand is driven by its use in jewellery. About 40% is from direct physical investment in gold, with about half held by financial organisations the International Monetary Fund (IMF), central banks and other entities. The remaining 10% is consumed by industry, where, as an excellent conductor of electricity, it is used in a range of electronic instruments, medical applications and gadgets.

Our millennia-old relationship with gold continues to drive a massive global demand for the yellow metal.

 

How much gold is there?

It is estimated that 54 000 tonnes of gold can be economically extracted with today’s technology. Fluctuations in gold prices, as well as developments of new gold extraction technology, will impact that number. All mines have a specific cost of production that the commodity price needs to support for the mine to be profitable. This is determined by a range of factors including quality and accessibility of ore, level of mechanisation and productivity, safety, and so on. These are all important factors to consider when investing in mining companies.

 

Investing in gold

There are different ways of investing in gold, depending on your investment objectives:

  • Physical gold (jewellery; gold bullion and bars; and coins)
  • Gold certificates
  • Gold EFTs (exchange-traded funds)
  • Gold mining stocks
  • Gold mutual funds
  • Gold futures contracts
  • Gold royalty companies

There are many advantages of investing in gold. Gold invesments can be used to hedge against inflation; for growth or income; or to diversify an investment portfolio. Each investment avenue has its own risk and return profiles, liquidity characteristics and fees; there is no one-size-fits-all or single best way to invest in gold.

Physical gold is easy to acquire and an effective guard against inflation, yet needs to be stored in a secure environment and doesn’t provide the same ROI as gold mining stock. Gold equity investments typically holds greater appeal for growth investors than income investors.

 

Is gold stock a good investment?

The benefits of investing in gold mining stock include maximised exposure to growth potential of the underlying company. Increases in the prices of gold are often levered in gold stock prices, with even small increases often having a disproportional impact on the price of gold stock as cash flows increase disproportionally with an incremental increase in the price of gold. The same degree of leverage is not available to investors in physical gold.

In addition, whereas physical investments in gold are only exposed to increases in the price of gold,  miners can expand their businesses over time by finding new deposit or acquiring other gold producers, with investors benefitting from the increased production, resulting in potential capital appreciation in excess of that of a physical gold investment.

Another important point to consider is how diversified you want your investment in metals to be. As gold-bearing ore often contains various other elements, miners will often mine gold in conjunction with other minerals. This can be both good and bad depending on your investment strategy and goals. A diversified metals portfolio can shield your investments against a potential downturn of a particular commodity, however dilutes your exposure to gold. (this does not help our case as we are a single commodity producer)

 

Where to invest: Junior, mid-tier or established miners?

Gold is mined by different-sized companies, from junior micro-cap companies to major mining houses with a market capitalisation greater than US$10 billion. This presents a variety of mining stock options for potential investors to choose from.

Given their small market capitalisation, junior miners – those companies producing less than approximately 150 oz/year – experience the greatest volatility in stock price but also offering a higher risk / reward investment product. Mining is a very capital-intensive industry, costing a lot of money to maintain and expand operations. Working capital is critical for all mining companies to survive, and this pressure is felt most acutely by the junior miner. Despite this, investors seeking to maximise producers’ leverage to gold often favour juniors.

On the other end of the spectrum, major, established mining companies provide greater stock market stability, and have a greater ability to weather any potential downturn in commodity prices  that can be fatal to smaller companies. These stocks, however, do not change in value as dramatically as smaller stock companies, offering typically lower but safer returns.

Offering well-balanced investment options, the attractiveness of mid-tier miners has surged, as these companies are well positioned for strong production growth. While major miners struggle with declining production and in finding enough new gold to offset depletion, mid-tiers with strong assets are increasing gold output and seen as the sweet spot for stock-price appreciation potential.

 

How do you know whether a gold mining stock is a good investment?

While the value of a gold mining stock is closely correlated with the gold price, expected future earnings of the company also affect the performance of the stock. Beyond factors such as a company’s dividend pay-out ratio, financial health and market position, potential gold investors should also carefully consider a company’s mining costs, management, existing mine portfolio, reserves, exploration and expansion opportunities at both existing and new assets.

Miners with high-quality assets and efficient production systems and processes are able to remain profitable even when the price of gold is down.

 

What drives up the price of gold?

Like any investment or financial asset, there are advantages and disadvantages of investing in gold. Like any commodity, gold is subject to supply and demand pressures, which cause the price to fluctuate, depending on a wide range of global factors.

Greater investment demand for gold is driven by its safe haven properties: a safe bet in times of economic and political uncertainty. As stock market risk increases, investors flock to safe haven investments like gold, spurring demand that then drives the commodity price up. This is why the price of gold often moves in opposition to volatility in markets or economies.

 

Why is gold a safe haven investment?

Gold preserves wealth more than paper money or currency-backed assets. Should a state or currency collapse, gold investments preserve their value, as it is tied to the global market price, driven by a worldwide supply and demand dynamic. Gold’s value often recovers quickly in times of economic downturns.

Because gold is not correlated to stocks, bonds or real estate, it is also a seen as a favourable option for investors looking to diversify their investment portfolio.

 

When is the best time to invest in gold?

Gold prices usually benefit when investors look for a safe commodity as stock market risk increases. As the gold price rises, so does the stock of mining companies. This is why gold often performs in the opposite direction to market or economic swings.

The price of gold continued to increase in 2019, outperforming many S&P 500 companies, and many experts believe the value of gold will continue to increase in 2020.

 

Gold vs. S&P 500

In the last 10 years, the S&P 500 has increased nearly 200%. Gold increased just over 43% in the same time period. In the preceding decade, however, the value of gold increased by more than 440%, compared to the S&P 500’s 58%.

During the global financial crisis from October 2007 to March 2009, the S&P 500 plunged over 55% while gold rose over 25%.

And while the S&P 500 of today has had a remarkable run – now the longest bull market in US history – experts are cautioning that this won’t last forever. Once these stocks peak – some analysts have earmarked this date as mid-2020 – they will begin to fall, and the price of gold is expected to surge. Experts are optimistic about the future of investing in gold. Now is a good time to invest.

 

Investing in gold in South Africa

When investing in gold, South Africa plays an important role in the global supply of the precious metal. South Africa was previously the world’s leading producer of gold, mining over 1 000 tons in 1970. Today, South Africa mines just over 120 tons per annum, as the world’s 9th largest producer.

South Africa currently has over 80 registered mining projects in various stages of development, and a number of active mining houses, juniors, mid-tiers and majors. Mines in South Africa are critical assets in increasing mining stock value.

 

Conclusion:

With gold likely to remain a strong performer through 2020 and beyond, especially in light of increasing stock market risks, gold as an investment option is returning to the spotlight. With a variety of gold investment avenues available, investors can build an effective portfolio to meet their investment objectives.

 

Frequently Asked Questions about gold investing

Is now a good time to invest in gold?

Some experts are predicting gold to hit a spot price of $2 000 and more in 2020, with good long-term prospects as well as a safe investment. With S&P 500 stocks expected to reach their peak later this year, now may be a good time to invest in gold.

 

Is investing in gold a good idea?

Investing in gold is a good idea, especially right now. Gold’s value has increased by over 21% in the last year, and is expected to rise further. It is an excellent investment in times of stock market risk, a foil against long-term currency inflation, and a good option for diversifying an investment portfolio.

 

How do you invest in gold?

There are a variety of options available to gold investors. Investors can buy physical gold (bullion, coins, etc.), exchange-traded funds or gold mining stocks. Each has its own risk and reward profiles, liquidity demands and fees.

 

Can I buy shares in gold?

You can buy gold shares by investing in gold mining companies (through stocks or royalties), through exchange-traded funds, or through gold mutual funds. Dividend pay-out ratio, financial health, production costs and expansion potential are some of the things to consider before buying gold shares.

 

How do I buy shares in gold?

To buy gold shares, decide whether you want to invest in gold mining companies directly, through exchange-traded funds or gold mutual funds. This will depend on what your investment objectives for gold are (growth, income, diversification, and so on).

 

Is investing in gold smart?

Gold is a defensive investment, performing well in uncertain and volatile market conditions. The price of gold has increased over 21% in the last year, and over 450% in the last 20 years. Gold is a safe and reliable performer, and an investment option for personal finance and investing for retirement.