Investing in Gold in 2023
There are many advantages to investing in gold. Gold investments can be used to hedge against inflation – as a store of wealth for centuries; for growth or income; or to diversify an investment portfolio. Each investment avenue has its own risk and return profiles, liquidity characteristics and fees; and there is no one-size-fits-all or single best way to invest in gold. We explore the best ways of investing in gold in 2023 below.
Analysts Say: Invest in Gold
Gold has been a strong performer for over 2 years now and was one of the strongest commodities across a very turbulent 2020. As predicted, it breached the lofty $2,000/o.z., peaking at $2,068 on August 6, well beyond its previous 2011 highs of $ 1,917.90.
This was not a complete surprise, as gold has historically been a sound investment choice in times of increased stock market risk as a safe haven investment and for those who prefer to hold physical investments instead of paper/FIAT money.
Aside from the upheaval of the worldwide coronavirus pandemic, a host of factors contributed to general investment uncertainty in 2020. The U.S./China trade dispute, threat of recession, and the events surrounding the 2020 presidential election in the U.S., helped the gold price 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.)
This is spurring increased interest in the range of investment products available to those interested in investing in gold. Potential investors in gold have a variety of products available to them, from physical gold and derivative instruments 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.
How to invest in gold
There are a number of different ways you can invest in gold, depending on your investment objectives. These include:
- Physical gold
- Gold ETFs (exchange-traded funds)
- Gold mining stocks
- Gold mutual funds
- Gold futures contracts
- Gold royalty companies
- Gold certificates
Physical gold can be acquired in the form of gold bullion bars and gold coins (such as the South African Krugerrand), as well as jewellery. Physical gold makes a great inflation hedge, yet storage and insurance costs also need to be factored into this investment. After all, money is just paper, while gold is indestructible and has been over hundreds of years.
Gold ETFs and mutual funds
In a gold mutual or exchange-traded fund, investors can purchase shares of gold investments held by a collective fund. These can be a combination of bullion and gold stock, managed on behalf of the investor, and so it’s easier and more cost-effective than physical gold investments.
Gold mining stocks
Purchasing equity in a well-governed mining company with profitable assets can yield higher returns on investment than simply relying on movements in the spot price of gold.
Gold futures contracts
A gold futures contract is an agreement to acquire gold at a specific price in the future. They are used by hedging investors to manage future price risk on metal, and provide greater leverage and flexibility than trading on the physical asset.
Gold royalty contracts
A gold royalty contract gives the investor a share of future gold earnings, in relation for the upfront investment, typically over the life of a mine. The gold royalty company uses these funds to provide capital for mining companies.
In some European countries, Australia and the US, a gold certificate is a financial product that banks offer for customers interested in gold investing. Certificates represent ownership of some form of gold bullion in a gold pool.
Is gold stock a good investment?
Gold stock is a good investment strategy for growth investors looking for higher return on investment (ROI). Increases in the gold price are often magnified in a gold miner’s stocks. The same leverage isn’t available to investors in gold bullion. Many gold stocks also pay cash dividends.
In addition, whereas bullion investments are tied only to increases in the price of gold, miners can improve their own equity performance by acquiring new strategic assets; invest in technology to boost productivity; and through effective governance and management.
Miners with a comprehensive ESG policy are also appealing investment targets for ESG investors, given their scope and potential to deliver meaningful social and environmental change.
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 junior miners.
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 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 is a safe haven because it’s proven to maintain value over time. Paper money or currency-backed assets can be acutely impacted by political and economic events. Gold is less exposed to these, and often performs better and recovers faster in periods of turmoil.
Because gold is not tied to stocks, bonds or real estate, it is also a good option for people 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 2023 and beyond.
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.
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 has returned to the spotlight in a big way. From the variety of physical gold, exchange-traded funds or gold mining stocks investment avenues available, investors can build an effective portfolio to meet their objectives.
Our millennia-old relationship with gold continues to drive a massive global demand for the yellow metal. Now is a good time to invest.
Frequently Asked Questions
We answer some of your questions about gold investing:
Is now a good time to invest in gold?
It is a good time to invest in gold to diversify your investment portfolio and create a valuable inflation and deflation hedge. According to the World Gold Council (WGC), investment demand for gold is expected to remain strong in 2022, with consumption expected to increase in line with economic recovery.
Is investing in gold a good idea?
It is always a good idea to have a portion of your investments in gold. Historically, gold has always maintained its value long-term, and can help protect your investment portfolio in markets with low risk appetite as a safe-haven investment.
How do you invest in gold?
There are many different ways to invest in gold. Investors can buy:
- Physical gold (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
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.
Is investing in gold smart?
Investing in gold is a smart move because it diversifies your investment portfolio; provides a hedge against inflation and deflation; is a safe-haven investment; and has reliably maintained its value over the long term. The price of gold has increased over 450% in the last 20 years.
How much gold is there left to be mined?
Around 54 000 tonnes of gold can be mined with today’s technology. It’s estimated around 190 000 tonnes have already been mined, which is 80% of our total gold reserves. Changes in the price of gold and new gold mining technologies will change the amount of gold we can recover.
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.