The Pros and Cons of Investing in Physical Gold and Gold Mining Stocks
During periods of economic and political uncertainty investors often diversify their portfolio with gold. Investors turn to physical gold and gold mining stocks because, as a currency, gold has a proven history as a safe haven asset and store of value.
Throughout the 1980s, gold prices remained elevated as the U.S. dealt with high inflation, strong oil prices, the Soviet intervention in Afghanistan, and the lingering effect of the Iranian Revolution. After climbing above $800 an ounce in 1979, gold prices retreated and settled in a range of between $300 and $400 per ounce for much of the 1990s.
Gold prices soared significantly higher, though, during the aftermath of September 11, 2001 and the Financial Crisis, in particular, the Lehman bankruptcy in September 2008. Between September 2001 and August 2011, gold prices soared close to 600%, hitting a record high of $1,917.90 per ounce.
While gold prices retreated a little over the following years, it has never traded below $1,000 per ounce.
Not surprisingly, gold prices got an additional jolt during the COVID-19 pandemic, crossing the $2,000 per ounce threshold for the first time. In March 2022, gold hit an all-time record high of $2,074.60 an ounce. That move was precipitated by Russia’s invasion of Ukraine.
Gold has fallen to around $1,730 per ounce but the outlook remains bullish on geopolitical tensions, stocks in bear market territory, runaway inflation, rising interest rates, strong oil prices, and a looming global recession.
What Are Some Pros and Cons of Investing in Gold?
For some investors, buying gold has several advantages.
Hedge against inflation: Inflation remains at multi-decade levels. This makes everything more expensive, which means your money has less purchasing power. If you have cash, you’re basically losing money. Gold on the other hand can act as a store of value, which can motivate some to move cash into precious metals.
Outperforms during recessions: Gold prices typically rise and fall in step with investor sentiment. And right now, with fears of a global recession, investors are increasingly bearish and looking to gold to hedge their bets against instability in financial markets.
Portfolio Diversification: It’s important to have a diversified portfolio that includes various types of assets. This can help hedge against market fluctuations. During the pandemic, entertainment and airline stocks cratered where medical stocks and those that catered to those working from home did well. Investing in gold is a defensive move that can help balance out your portfolio.
Gold is an excellent hedge that can add balance to a portfolio but like any investment there are some risks.
Long-term performance: While gold prices can rise quickly and store value, it differs from other investments like stocks and bonds in that it generates no cash flows, earnings, and for some, requires storage costs. Dividends and coupon payments are big drivers of total shareholder returns, which is why gold has underperformed stocks and bonds over the last 30-years.
Speculative nature of price: The price of gold is not influenced by anything objective like earnings. The price is speculative, influenced by supply and demand factors. And, unlike stocks that provide dividends, investors only get a return on their investment when they sell it.
Knee-jerk investment: Investors tend to turn to precious metals like gold when the markets get volatile. This can lead to investing decisions motivated by fear as opposed to what works best for their long-term success.
What Are the Best Ways to Invest in Gold?
There’s a visceral feeling to owning physical gold. But there is also a finite amount of gold out there. The total amount of gold that has been mined throughout history, and is still in existence today, could fit in a cube with sides of just 22 meters, or 72 feet.
When you purchase bullion, it will cost a little more than what is quoted online. That’s because sellers charge a premium over the spot price.
Gold Mining Stocks
Another way to add gold to your portfolio is through gold mining stocks. You may not get to own physical gold but you could realize gains that significantly outpace the price of physical gold.
Why? If it costs a company $700 to mine an ounce of gold that sells for $1,000 an ounce, the company generates a profit of $300.
But, if gold rises to $1,300 an ounce, the company realizes a $600 profit on each ounce of gold. That means the company makes a 100% increase in profits off a 30% increase in physical gold prices.
Sharp Asset Management for Your Retirement Planning
It’s important to have a diversified investment portfolio, one that meets your risk tolerance, goals, and portfolio makeup. For some, that will include precious metals like gold, silver, platinum, and palladium.
If you live in Toronto, Mississauga, or anywhere in the GTA and are looking for a portfolio management firm or asset management company to help you build a diversified retirement portfolio designed to suit your investment goals, Sharp Asset Management can help.
Sharp Asset Management Inc. is an independent portfolio management firm that is 100% owner-operated. Since we are a highly concentrated group of professionals, we can respond quickly to changing market conditions.
Sharp Asset Management is not affiliated with any financial institution, securities firm, or mutual fund company. Nor do we earn any commissions or fees on investments we choose for our clients. That means our team of wealth management professionals is focused exclusively on helping you achieve your unique, long-term investing objectives. To learn more about investing with Sharp Asset Management, contact us today.
*This is the opinion of Sharp Asset Management and should not be taken as financial advice.