How to invest in gold right now

How to invest in gold right now
How to invest in gold right now

On April 12, the spot gold price reached an all-time high of $2,431 per ounce. Since then, the bullion’s value has fallen slightly to around $2,300, a range that remains historically high, with a return of around 25% over the past seven months.

“Gold has already priced in the expected reduction in the Federal Reserve’s monetary policy easing outlook for 2024, but it continues its upward trajectory,” explains Ned Naylor-Leyland, manager of Jupiter AM’s Gold & Silver fund. “This suggests that other factors are at play, such as the return of significant demand for physical gold, particularly from China and the Middle East. This wave of physical buying could be driven by a convergence of factors such as inflationary concerns and rising geopolitical tensions in the Middle East.”

Surprisingly, over the past year, $15.6 billion of client funds have been withdrawn from precious metals exchange-traded commodities (ETCs), with April marking the monthly outflow record for this category. Faced with this profit-taking, it is clear that these investment tools are not at the origin of the global rise in gold prices.

Who buys all this gold?

China has become one of the world’s largest buyers of gold. The China Gold Association (CGA) reported that the country’s gold consumption in 2023 was nearly 1,090 tons, an increase of 8.73 percent year-on-year. Another indicator of overall gold demand in China, the Shanghai Gold Exchange (SGE), reported a 95% increase in demand in January 2024 compared to the previous year.

“Behind China’s record demand lies an interesting demographic shift,” continues Ned Naylor-Leyland in his April 30 report. “Young buyers, aged 25 to 34, increased their share of total gold purchases from 16% to 59% in 2023. The decline in the stock market and local property values ​​contributed to the boom in the younger generation, but it is the form of investment that indicates the true nature of the demographic shift. Young Chinese buyers are choosing to buy 1 gram gold grains to preserve their long-term wealth.

This strong demand could remain confined to Asia for some time. According to Bert Flossbach, co-founder of Flossbach von Storch, in the United States, “the real interest rate on inflation-indexed bonds is 2% and would have to fall significantly for gold to become attractive to investors again as a hedge against inflation.

On April 22, Flossbach wrote that “it is not possible to make serious forecasts about the price of gold. Over the past ten years, investors have benefited from an annual increase in the price of gold of more than 8% in euros. For the future, no similar growth should be expected. For us, investments in gold are not focused on yield, but on their insurance character. as part of a diversified investment strategy.”

Is it time to invest in gold stocks?

While the value of physical gold has recovered sharply, the share prices of companies that mine and trade it have been slow to follow.

A simple comparison of two ETFs from the same management company exposed to these two asset classes, the iShares Physical Gold ETC and the iShares Gold Producers ETF, clearly shows this gap: over the past year, the first gained 17.7%, while the second only increased by 2.5%.

On the other hand, it seems that something has changed in the last three months, as the iShares ETC on physical gold rose by 14.4% and the ETF on shares of gold mining companies by 20.4% .

Gold mining stocks can rise significantly when gold rises, but this is not always the case. Traditionally, mining stocks are more volatile and amplify physical gold price movements – their correlation is only visible in the long term.

Gold mining stocks start to catch up with gold prices

“After years of undervaluation against the yellow metal, the NYSE Arca Gold Miners Index and the MVIS Global Juniors Gold Miners Index have significantly outperformed gold since March. This could mark the start of a long-awaited turnaround for gold mining stocks,” said Imaru Casanova, portfolio manager for gold and precious metals at VanEck.

“The best performing companies in the sector must also demonstrate fundamental positioning and a strong strategy that translates rising gold prices into improved cash flow and higher returns, which will enable growth.” , continued Casanova in his note published on April 30. “Organic growth is not easy in the gold sector. Searching for new gold deposits or defining/expanding existing deposits is a difficult, time-consuming and capital-intensive process. To expand significantly as their reserve and resource base becomes depleted, companies generally must acquire other companies or assets. All other things being equal, the more advanced a project is, the higher its valuation and the more the company becomes. develops rapidly.”

This story was originally published in Italian on May 6, 2024

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