Like many, I keep hearing about looming recession and Gold as a hedge. But how exactly gold is going to help me and if yes, how to invest is something running behind my mind.
So here is my work on it and hope it helps you too.
Why Invest in Gold ?
Fiat currency we are holding is loosing its value at the rate of inflation. But before fiat currency, gold is the standard. Based on current technology, its difficult to extract gold. so in the demand vs supply equation, supply cant balloon like central banks printing money at their will. so i dont need to worry about Gold loosing its value over time.On Supply part, As per World Gold Council estimate 190,040 metric tones extracted and another 54000 metric can be extracted from ground.
Refer : https://www.gold.org/about-gold/gold-supply/gold-mining/how-much-gold
On the Demand part, Below are the key drivers of Gold demand
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| Source: Thomson Reuters GFMS, World Gold Council |
As an investment, From individual investors to Central banks increasing their share of Gold holdings.
Refer https://www.gold.org/what-we-do/investing-gold/why-invest-gold/mainstream-investing-in-gold
Since Gold supply is relatively restrictive (due to Technology and availability) and Demand is consistent, the price of it typically grows at min rate of inflation (rate of fiat currency depreciation).
Due to heavy leverage involved in stock markets, often value of a stock trades at multiple times. In the times of correction, investors flee to Gold as a safe heaven. Below is the comparison data during last recession (Sep 2007 to June 2009)
Since we saw why we should invest in Gold, lets see how to do it
How to Invest in Gold
Here are the traditional ways of investing.
But there is a problem with this.
Typically this type of investment purely depends on the Demand and Supply and highly influenced by how Fiat based markets operate. Apart from this, there is no other growth potential.But if you look at Companies that mine Gold, they offer better returns as the mining business expands. How ever it comes with risk of operating any business, in this case operating mines. While producing Gold, there will be other metals produced too and it offers inherent diversification.
Like any other business, we have to verify Revenue, operational cost, profits etc., before investing. If you would like to reduce the risk further, you can diversity through Gold mining focused ETFs. They offer diversification for a fee.
Beyond these two, there are streaming and Royalty companies, which finance mining companies for royalties and deals to buy commodities at reduced price in future. These companies paid in gold and avoids operational risk. The pure risk here is bankruptcy of financed mining company.
Here are the details
As it sounds like best way to invest in Gold, I compared performance of 3 biggest Gold Streaming and Royalty companies (WPM, FNV and RGLD) and Gold Mining ETF (GDX), Gold ETF (GLD) with S&P 500 (GSPC) Year to date.
While S&P 500 grown by 11%, Gold ETF grown by 13%, Gold Mining ETF grown to 20%, Gold streaming companies grown by 30+%.
Please note : SP500 is having a long bull run and running out of steam. On the other hand, Gold is expected to start its bull run. So the number holds good for now, may not hold all the time.
Hope it helps.
Please do comment if something doesn't make sense to you.
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