8 Pros of Investing in Gold
Gold has been a more stable investment than other asset classes during times of economic and geopolitical crisis. It’s regarded as one of the world’s investment safe havens because when financial markets are under pressure, such as now, investors often flee to the safety of gold. According to data from GoldSilver, gold prices went up in six of the last eight biggest stock market crashes over the past four decades. During the Global Financial Crisis, the gold price increased by more than 25%, whereas the S&P 500 Index fell by more than 50%.
Physical gold’s greatest strength is that it is a tangible asset that will always hold its value. Its appeal lies in the fact that owners and investors can hold it in their hands, appreciate its value and gain a sense of security that it will always be there. The precious metal’s value also rests on its rarity and the fact that politicians or policymakers cannot issue more or less of it as they can with, say, the dollar.
An inflation hedge
Gold prices have outpaced inflation in the long term, preserving wealth and protecting investors, particularly in times when interest rates are rising, such as now. The precious metal maintains its purchasing power like few other assets. Based on analysis by personal finance and investment expert Steven Keys, gold has delivered an annual after-inflation return of 1.2% annually since 1974.
Gold is typically uncorrelated with other asset classes, rising when they are falling and falling when they are rising. Adding it to an investment portfolio reduces the overall risk profile of a portfolio and smooths out its return profile. Since 1884, the negative equity-gold correlation has exceeded -50% in 1987, 1990, 1993, 2001, 2002, 2003, and 2008. In 2021, the 65-day correlation was -58% – its most negative correlation since 2003.
Gold shares pay dividends
Unlike other asset classes, physical gold has the disadvantage of not offering an income stream. However, gold stocks, when carefully chosen, do distribute the dividends investors don’t receive from bullion while still giving investors exposure to the other benefits of investing in gold.
Capital growth upside
Gold shares offer far more capital growth potential than physical gold because the share prices of well-managed gold companies can offer leveraged exposure to the underlying gold price. So, a relatively small increase in the gold price can result in greater increases in the company’s stock price.
Direct and indirect gold exposure
There are many ways of getting exposure to gold, each with different pros and cons. You can get physical exposure through bullion, coins and jewellery and indirect, paper-based exposure to gold via gold stocks, ETFs, and mutual finds. As with all investments, the decision of where to invest should be made based on the investor’s risk profile and financial goals.
Arguably the most enduring characteristic, and the one that has been most appealing to holders of physical gold throughout history, is the fact that it is portable and can be moved anywhere. Gold comes in different sizes and forms, from jewellery, and coins of different sizes to bullion bars, which means you can move either your entire investment or part of it in times of need.
8 Cons of Investing in Gold
Costs of securing gold
Gold investors need to secure their investment and thus incur ongoing storage and insurance costs that eat into the potential profits offered by an investment in the precious metal. You can store the gold yourself, but you need a safe that’s big enough, and you run a greater risk of theft than securing them with a professional storage company.
Investors in gold bars and coins must pay a premium for the dealer’s services, while investors in gold ETFs and shares pay brokerage fees. These costs need to be factored in an investor’s cost-benefit analysis before including gold in a portfolio.
Though gold offers investors a steadier ride over time, it can be more volatile than envisaged at times, with swings of between -50% to 100% in periods as short as two years. So don’t be surprised if you experience prolonged periods of negative returns.
No income stream
Physical gold pays no dividends, and thus, gold bullion does not give investors an income stream. This needs to be factored into your investment decisions because investing in gold stocks or other listed asset classes would give you a passive income stream, which contributes substantially to total performance over time.
It’s not easy to determine the purity of physical gold at face value, which is why it’s so crucial to buy gold bars, coins, or jewellery from reputable sellers.
Gold does underperform for significant periods of time, and historical performance shows that equities have outperformed gold by 16 times since 1974. Thus, when you invest in gold, you risk losing out on significant outperformance of other asset classes.
Paper-based gold investments
Investors who buy gold shares, ETFs and mutual funds don’t get the same full benefits of buying the physical metal because the relationship between investing in paper versus physical gold is not perfectly correlated. There may be times when the gold price will increase, but the value of a listed gold portfolio may decline.
Jewellery’s investment complexity
Investors who buy and sell jewellery can make money, but there’s a lot more at play when determining the value of gold jewellery that cannot be rationally quantified. Also, the costs of making jewellery are higher than the premium investors would pay for other forms of physical gold and varies between 6% and 14% of the price of gold.
Why PAR is a good investment
Pan African Resources (PAR) offers many features that make it a promising investment and a good way to get exposure to the gold mining industry at a time when the gold price is benefiting from the prevailing geopolitical ructions.
These are its resilience in the face of electricity load shedding in South Africa, its investment in renewable energy plants, which will substantially reduce its dependence on state-owned electricity, and the potential offered by its upcoming Mintails project.
Loadshedding has been a major headwind for most companies this year. Gold mining companies, in particular, rely heavily on electricity. So, it’s no surprise that PAR recently issued new production guidance that is lower than previously expected. The mid-sized company, which engages in gold mining in South Africa, now expects production of 175 000 ounces – 15% lower than its 205 000-ounce record high in 2022.
However, it’s promising that production at PAR’s tailings operations, which contributes about 40% to overall production, increased in the first half of this year compared to the previous year. The tailings operations are less electricity intensive than the underground operations and don’t have to stop production during load shedding as often as the underground mining operations.
PAR is also investing heavily in renewable energy sources to alleviate the strain of load shedding on its operations. It is the first mining group to bring a solar plant online. The 9.9MW unit at Evander came into operation in May 2022 and is the first of four planned plants, raising the mining group’s future electricity-generating capacity to 40 MW and meeting 15% of its own energy needs by 2027.
At the end of March this year, PAR finalised the funding for its Mintails project, which is scheduled to come on stream at the end of 2024, adding 25% of cheap and safe ounces to its annual production capacity. Shareholder Charl Botha describes the projected economics of Mintails in Biznews as “sweet” and that he “couldn’t be happier with the results.”
When Mintails is up and running towards the end of 2024, it will not only increase PARs annual production by about 25%, but the ounces it is likely to add will be both “cheap” and “safe”.
PAR takes Environmental, Social and Governance (ESG) factors seriously and is wholeheartedly committed to reducing its environmental footprint. It has rehabilitated 22.3 hectares of the land it operates on to date. At its Evander Mine, the group has been reprocessing historic gold tailings to allow rehabilitation of the dump footprints, allowing for alternate and more productive use of the land.
Considering all the factors that determine gold’s value and investing in precious metals’ pros and cons, there’s no doubt that gold deserves a place in any investment portfolio. But given there are various ways to invest in gold, you need to do your homework and determine which avenue for investing best suits your financial needs and goals.