Investing in Gold in 2022
Investing in gold provides several benefits. Gold investments add diversity to your investment portfolio, protecting you against inflation and offering the potential for portfolio growth and income. There is no definitive formula or optimal approach to gold investment. It always involves risk-return considerations, liquidity factors, and associated fees. To learn more about the best ways to invest in gold in 2022, continue reading below.
Analysts Say: Invest in Gold
In the volatile year of 2020 and in subsequent years, gold emerged as one of the most resilient assets. As anticipated, it reached its peak at $2,068 and $2,000 per ounce on August 6, surpassing the previous record high of $1,917.90 set in 2011.
Investing in gold has proven to be a prudent investment choice in the past, as it has been considered a safe haven for investors, offering protection against the risks of the stock market. Therefore, it did not come as a complete surprise.
In addition to the turbulence caused by the global coronavirus pandemic, several events in 2020 led to widespread investment uncertainty. These included trade disputes between the U.S. and China, recession concerns, the 2020 US presidential election, and related events, all of which contributed to the resilience of the gold price.
Long-term factors are reinforcing gold’s position as a protected asset, including the growing recession and the weakening US Dollar. A decrease in the US dollar makes gold prices more affordable for investors using alternative currencies due to gold being typically quoted in dollars.
The surge in interest surrounding gold investment has led to a wider array of investment products for potential investors to consider. Those interested in investing in gold now have a diverse range of options available, including physical gold, derivative instruments, and gold mining stocks. When constructing a gold investment portfolio, it is crucial to align it with your specific investment objectives, as each avenue offers distinct features and advantages.
Here is a guide to investing in gold.
How to invest in gold
There are various avenues available for investing in gold mining stocks and will depend on your investment goals. Some of these options include:
- Physical gold
- Gold ETFs (exchange-traded funds)
- Gold mining stocks
- Gold mutual funds
- Gold futures contracts
- Gold royalty companies
- Gold certificates
Investors can obtain physical gold through gold bullion bars, gold coins like the South African Krugerrand, and even jewellery. Physical gold serves as an effective hedge against inflation, offering protection for investors. However, it’s crucial to consider the costs associated with storage and insurance as essential factors in this type of investment.
Gold ETFs and mutual funds
When it comes to gold exchange-traded funds (ETFs), investors have the option to purchase gold investment shares regulated by a shared fund. These investment opportunities can involve gold bullion or stocks, which provide an easier and more solvent alternative than investing in physical gold.
Gold mining stocks
Investing in well-run mining company shares with cost-effective assets can result in higher investment returns compared to solely relying on changes in the spot price of gold.
Gold futures contracts
A gold futures contract is a legally binding agreement to buy gold at a fixed price in subsequent years. It offers more leverage and durability than physical assets being traded, and investors use these contracts to lessen possible price risks correlated with the metal asset.
Gold royalty contracts
A gold royalty agreement offers investors a portion of future gold earnings rather than an upfront investment typically tied to a mine’s lifespan. The royalty company uses these earnings as capital for other mining corporations.
In specific countries in Europe, the US and Australia, banks offer gold certificates as a financial product to customers looking to invest in gold. These certificates represent ownership of a fraction of gold bullion held within a gold pool.
Is investment in gold mining stock a wise decision for investors?
Investing in gold mining stock and shares is an advantageous strategy for investors pursuing growth and higher returns on investment (ROI). The value of gold mining stocks often experiences amplified growth in response to increases in the gold price, offering a level of leverage that is not attainable with gold bullion investments.
Moreover, while bullion investments are solely influenced by changes in the gold price, gold miners have the ability to enhance their equity performance through strategic asset acquisitions, investments in productivity-enhancing technology, and by maintaining effective governance and management practices.
Miners that have a comprehensive Environmental, Social, and Governance (ESG) reporting policy are also highly appealing to ESG investors, owing to their extensive influence and potential to drive substantial social and environmental improvements.
Where to invest: Junior, mid-tier or established miners?
Companies of different sizes mine gold, from junior micro-cap to large mining corporations with a market worth of approximately US$10 billion. This allows investors to have a diverse range of options to choose from when it comes to mining stock.
Junior mining companies, producing approximately less than 150 oz/year, exhibit the highest volatility in prices of stock. Nevertheless, they present a risk and reward investment opportunity. The mining industry demands considerable capital investment for operations and growth, making working capital indispensable for survival. Junior miners face the most significant pressure in this aspect. Despite the challenges, investors aiming to maximize their exposure to gold often favour junior mining stocks.
Alternatively, major established mining companies provide greater stability in the stock market. They are better equipped to withstand potential downturns in commodity prices, which can be dire to smaller companies. While these stocks might not experience as drastic fluctuations as their smaller counterparts, they typically provide lower and safer returns.
With a well-balanced range of investment choices, the appeal of mid-tier miners has experienced a significant surge. These companies are strategically positioned for robust production growth, making them a compelling investment option, particularly in the gold mining sector. While major miners grapple with declining production and the challenge of replenishing depleted reserves, mid-tier miners with robust assets are steadily increasing their gold output, presenting an ideal opportunity for potential stock-price appreciation.
How do you know whether a gold mining stock is a good investment?
While gold mining stock performance is closely linked to the price of gold, the anticipated future earnings of the company also hold great importance. Apart from factors such as a company’s dividend payout ratio, financial robustness, and position in the market, potential gold investors should carefully evaluate a company’s mining costs, their management, existing mine portfolio, reserves, and exploration and expansion prospects for both existing and new assets.
It is worth noting that miners with high-quality assets and well-organized production systems can sustain profitability even during times when the gold price is low.
What drives up the price of gold?
Gold, like most commodities, is subject to price fluctuations driven by supply and demand, often in response to global events.
The demand for gold investments rises significantly due to its status as a safe haven asset, making it a dependable choice during times of economic and political turmoil. As the risk in stock markets increases, investors seek the security of safe-haven assets like gold, resulting in a rise in demand that drives up the commodity’s price. This phenomenon highlights why the gold price often moves in a contrasting direction to market or economic volatility.
Why is gold a safe haven investment?
Gold is renowned as a safe haven investment due to its ability to preserve value over time, unlike physical notes or currency-based assets that can be susceptible to political and economic disruptions. Gold typically demonstrates greater resilience to these factors and often performs better, recovering more swiftly during tumultuous periods.
Furthermore, gold offers distinct advantages as it is not tied to bonds, stocks, or property, making it an effective choice for investors seeking to diversify their portfolios.
When is the best time to invest in gold?
Investors recognise the value of gold when stock market risks escalate, as they seek a safe haven or a reliable commodity. The price of gold and mining company stocks often rise together, which explains why gold tends to thrive during market or economic fluctuations.
In 2019, gold prices outperformed several S&P 500 companies, leading experts to believe that gold’s value would continue to rise in 2022.
Investing in gold in South Africa
South Africa’s history as the world’s leading gold producer is due to the abundant gold reserves in Africa. In 1970, 1,000 tons of gold were mined, solidifying its status as a gold-rich nation. South Africa continues to play a pivotal role in global supply, ranking as the 9th largest producer of gold worldwide, with an annual production of over 120 tons.
As we look to the future of gold mining in South Africa, the industry remains promising. Currently, there are more than 80 registered mining projects in different stages of development alongside numerous active mining houses. These assets are integral in determining the value of mining stocks, showcasing the ongoing importance of South African gold mines.
Gold is projected to remain a reliable performer in 2020 and beyond, especially given the increasing risks in the stock market. Gold has emerged as a prominent investment choice, attracting significant attention. Investors have a range of options at their disposal, such as gold bullions, exchange-traded funds (ETFs), and gold mining stocks, enabling them to construct a robust portfolio aligned with their objectives.
The enduring allure of gold, rooted in our historical connection with the precious metal, drives substantial global demand. Therefore, the current period presents an opportune time for investment.
Frequently Asked Questions
Let us answer your questions about investing in gold:
Is now a good time to invest in gold?
Investing at this time enables you to diversify your investment portfolio while providing valuable protection against inflation and deflation. In accordance with the World Gold Council (WGC), the demand for gold investment in 2022 is predicted to remain strong, and consumption is expected to increase as the economy improves.
Is investing in gold a good idea?
Historically, gold has demonstrated its ability to maintain long-term value and effectively safeguard investment portfolios in low-risk markets. Therefore, allocating a portion of your investment to gold stocks is a prudent choice.
How do you invest in gold?
These are the many ways for you to invest and buy gold:
- 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 comes with its own risks and rewards, liquidity demands and charges.
Can I buy shares in gold?
To acquire gold shares, you have several options such as investing in gold mining companies (via stocks or royalties), exchange-traded funds, or gold mutual funds. Before purchasing gold shares, it is essential to evaluate factors like dividend payout ratio, monetary stability, production expenses, and growth potential.
Is investing in gold smart?
Investing in gold is a wise decision as it adds diversification to your investment portfolio, acts as a safeguard against inflation and deflation, and serves as a safe-haven investment. Moreover, gold has consistently preserved its value over the long term, with its price experiencing a remarkable increase of over 450% in the past two decades.
How much gold is there left to be mined?
With the advancements in technology today, approximately 54,000 tonnes of gold can be mined. Around 190,000 tonnes, which accounts for 80% of our total reserves, have already been extracted. The recovery of gold from mine tailings will be influenced by future technological developments and fluctuations in gold prices.
The production cost of each mine is unique and must be supported by the commodity price to ensure profitability. Factors such as the quality of the ore, accessibility, level of mechanization, productivity, and safety all contribute to this cost. These factors are of utmost importance when considering investments in mining companies.