Gold stocks and exchange-traded funds (ETFs) are often assets that investors gravitate to during times of economic uncertainty. The price of gold has risen by over 30% in the last year, with gold stocks and ETFs following suit. Despite a recent decrease, inflation has remained strong. During instances of high inflation, investors frequently seek out gold as a safe haven. Let's dig deeper into what investing in gold entails and whether it's still a smart investment at its present price.
As the global economic landscape continues to evolve, gold's allure as a safe-haven asset has only grown stronger. The ongoing geopolitical tensions, including conflicts in various parts of the world and trade disputes between major economies, have contributed to gold's appeal. Investors are increasingly viewing gold as a hedge against not just economic uncertainty, but also political instability. This shift in perception has led to a surge in demand for gold-related investments, further driving up prices and attracting more attention to the sector.
Let us remember that, in the end, all investing is personal, and it is up to the individual in charge of the money being invested. Gold has always been a contentious issue in investment circles. Some consider it important, while others believe it has passed its prime, and many fall somewhere in the middle. Gold has historically been used as an inflation hedge because market participants believe it protects the real worth of assets when other prices rise. This is because, unlike typical fiat currencies, which lose value when central banks issue more money, gold's worth remains stable. When the cost of living rises, as it has since the pandemic, gold's intrinsic value shines even brighter, giving a physical and long-lasting asset against the dwindling value of fiat paper money.
Generally, gold has little association with other assets such as equities and bonds. It frequently moves inversely, creating a balancing effect that can assist lower total portfolio risk. Throughout history, gold has continually proved its ability to survive crises, and when geopolitical tensions increase or financial markets get volatile, investors frequently turn to gold as a safe haven. However, no study of gold would be complete without adding that, like any other investment, its value at any given time is determined by what someone is prepared to pay for it. Gold is priced in several currencies and has also been compared to its own currency. All of this adds up to gold being a distinctive, albeit possibly complex, investment. Historically, this has resulted in a wide range of emotions, including pleasure and disappointment.
The environmental impact of gold mining has become an increasingly important consideration for investors and companies alike. As sustainability concerns gain traction, many gold mining companies are adopting more environmentally friendly practices. This shift towards responsible mining not only addresses ecological concerns but also potentially impacts the valuation of gold stocks. Investors are now factoring in a company's environmental, social, and governance (ESG) performance when making investment decisions, adding another layer of complexity to the gold investment landscape.
Gold Stocks and ETFs Explained
What Are Gold Stocks and ETFs?
There are several ways to buy gold. The rising price of gold does not have a clear correlation with gold stocks or ETFs. Gold stocks are shares in firms that explore, mine, and produce gold. Gold ETFs, on the other hand, allow investors to profit from changes in the price of gold without having to purchase the physical item. Essentially, with gold stock investing, you are purchasing a piece of the individual company and its performance. An ETF is more of a direct investment in the price of gold because it owns a portion of the gold held by the trust.
How Gold Stocks and ETFs Differ from Physical Gold
The most significant distinction between holding gold stocks and actual gold is investors' risk tolerance. Gold stocks fluctuate more depending on the company's financials and market prospects. When the economy spirals, physical gold provides long-term stability and increased security. Gold ETFs provide a true physical gold investment experience while offering greater liquidity and less logistical obstacles than owning the actual metal.
The advent of blockchain technology and cryptocurrencies has introduced a new dimension to gold investments. Some companies are now exploring ways to tokenize gold, creating digital representations of physical gold on blockchain networks. These "digital gold" tokens aim to combine the stability and value of gold with the convenience and accessibility of cryptocurrencies. While still in its early stages, this innovation could potentially revolutionize how investors interact with gold, offering new opportunities for diversification and potentially attracting a younger, tech-savvy investor base to the gold market.
Examples of Popular Gold Stocks and Funds
Let's look at some well-known gold stocks and funds. Newmont (NEM) is the world's biggest gold miner. It produces gold and many other metals around the world. Barrick Gold (GOLD) boasts one of the industry's largest portfolios of high-quality gold and copper assets, as well as a strong operational track record. The SPDR Gold Trust (GLDGLD 0.0%) is the oldest gold exchange-traded fund on the US market. Its purpose is to reflect the price of gold bullion, which is the physical form of pure gold found in bars or coins.
Current Market Trends for Gold
Few assets have the timeless appeal of gold and the ability to attract investors' attention as it does. Understanding current gold market trends is more important than ever as we navigate an era marked by economic upheavals, geopolitical tensions, and changing market dynamics.
Recent Performance of Gold Prices
The price of gold has climbed by more than 21.5% year to far, and nearly 30% in the last year. In October 2022, the price of gold fell to a recent low of $1,644. Today, the precious metal is worth approximately $2,530, representing a 53% gain in less than two years. In fact, if you broaden your perspective even more, the decade-long "rally" started in January 2016. Gold was at $1,075, representing a 135% increase in just under nine years.
The role of central banks in the gold market has become increasingly significant in recent years. Many central banks, particularly those in emerging markets, have been steadily increasing their gold reserves. This trend is driven by a desire to diversify away from the U.S. dollar and other major currencies, as well as to bolster economic stability. The consistent buying pressure from these institutional players has contributed to the sustained upward trajectory of gold prices and is likely to continue influencing the market in the foreseeable future.
Factors that influence gold prices:
There are several variables driving up gold prices, including strong market sentiment, ongoing geopolitical instability, and demand from central banks. Inflationary pressures in recent years have also contributed significantly to an increase in the price of gold. As prices rise throughout the economy, investors may purchase more gold and other precious metals to protect the purchasing power of their money. Historically, the price of gold and interest rates have been inversely related. Despite the fact that interest rates just reached their highest point in 20 years, gold rose significantly during this time. It makes investors worry if gold would rise whenever the Federal Reserve finally decides to cut interest rates. With September's Fed meeting expected to bring the first rate drop since the agency began rising rates over two years ago, we should know soon.
Analyzing the current price of gold stocks.
For investors, gold stocks can perform very differently than the physical asset. They frequently serve as an intermediate focus point for investors seeking both stability and development potential.
Valuation Metrics to Consider
When examining gold equities, there are several valuations to consider. Net asset value (NAV) is a key statistic for appraising mining firms. It is the total worth of a company's assets less its liabilities. Gold mining firms often include the value of their gold deposits, resources, and any other assets they may own. Companies in the gold mining business often trade at a discount to their net asset value, with the exact multiple shifting depending on factors such as stage of development, jurisdiction, and overall market circumstances. Another indicator is price to net asset value (P/NAV), which compares a company's market capitalization to its NAV.
Current Performance of Major Gold Stocks:
Gold stocks have risen in tandem with the current increase in gold prices. Over the past six months, Newmont Mining and Barrick Gold have increased by 54% and 26%, respectively. With interest rates expected to fall many times over the next year, gold equities may only be getting started.
Factors influencing the price of gold stocks
The longer and higher gold stocks surge, the more traders will want to invest more capital to capitalize on those gains. This will also result in more frequent and positive financial media coverage, increasing awareness of the sector. Gold miners are posting their best quarterly performance and highest profits in history, boosting institutional buying. Some analysts believe gold stocks are undervalued and predict additional growth once the AI stock bubble bursts.
How to analyze the current price of gold ETFs
Gold ETFs have emerged as a popular tool for investors seeking exposure to the precious metals market. As previously stated, these index funds allow you to acquire exposure to gold price changes without physically owning the metal.
Valuation Metrics for Gold ETFs
Now, there are gold "mining" ETFs that function more like typical index funds, with a basket of underlying companies mostly from the gold mining business. With these, it is vital to consider standard ETF valuations such as assets under management, P/E ratios, and underlying company profitability.
Recent Performance of Major Gold ETFs
Consider Van Eck Gold Miners (GDXGDX 0.0%), a gold mining ETF that covers 59 different equities in the sector. The fund is up 30% in the last year, with the majority of that increase occurring in the last five months. GLD, as previously stated, is a trust that monitors the price of gold. It is also up 30% year over year. However, the gains for this trust have been more evenly distributed throughout that period, demonstrating how the two forms of gold ETFs do not necessarily advance in tandem.
Factors influencing the price of gold ETFs
The factors that drive gold ETFs are naturally the same as the price of gold or gold stocks. Concerns about inflation, economic uncertainty, and supply and demand are all key considerations when investing in gold ETFs. The US dollar has fallen by about 10% in recent years. A weaker dollar makes gold more affordable for international investors, increasing worldwide demand for gold and, as a result, driving up the price of gold ETFs.
Benefits and Risks of Investing in Gold Stocks and Exchange Traded Funds
Whatever form of investment you pursue with gold, it is critical that you grasp the major rewards and hazards linked with the yellow metal.
Benefits:
Inflation hedge: Gold's price tends to climb with rising living costs. This is because when fiat currency loses purchasing power due to inflation, gold is priced in those currency units, causing it to rise along with everything else.
Geopolitical Uncertainty (SAFE) -4.2% Haven: Gold retains its worth not just during financial and geopolitical instability. It is known as the "crisis commodity" because people run to its relative safety when global tensions increase.
Capitalizing on US Dollar Weakness: Although the US dollar is one of the world's most important reserve currencies, when its value falls against other currencies, consumers often flock to gold for security, raising gold prices.
Risks
Price Volatility: The price of gold can be erratic, with large fluctuations over short periods. This makes predicting its value tricky, and it might be a risky investment.
Storage and Insurance Costs: If you physically own gold, you must store it securely and protect it against loss or damage.
Are Gold Stocks and ETFs Worth Buying at This Price?
Gold stands out as a fascinating asset class and precious metal that has been avidly coveted for millennia. Gold stocks and ETFs have emerged as attractive avenues for investors to obtain exposure to the metal without physically holding it. The major question is whether these stocks and ETFs are worthwhile investments at this pricing.
Gold Stocks: Current Value And Future Prospects
As economic uncertainty and market volatility continue to affect investment decisions, gold stocks are gaining traction among investors. These equities, which represent shares in firms involved in gold exploration, mining, and production, provide a unique potential to gain from the industry's performance.
As a "lifelong" market technician and quant, my late father taught me to chart stocks with graph paper and pencil at the age of 16.I've progressed to greater technology since then!) I can't help but compare gold and gold stocks to where they are in their longer-term price cycle. I created a chart of the ETF GLD dating back to its creation and examined its three-year performance. GLD's annualized three-year return is approximately 11%. That is in the middle of its historical range, therefore I infer that it is neither a screaming buy nor significantly overvalued. As investors, we must sometimes choose between two extremes. That, I believe, applies to gold and gold stocks for long-term investors.
Gold ETFs: Current Value and Future Prospects.
As is typically the case with gold ETFs, we can take my thoughts on gold above and apply them to gold stocks. I conducted the same three-year total return study on GDX, and it came in at 7.6%, which is likewise in the middle of its historical range. Interestingly, I did similar study on VanEck Junior Gold Miners (GDXJDXJ 0.0%GDXJ 0.0%), a fund that invests in "junior" or smaller gold mining businesses. Its average annual return over the last three years has been 2.6%. While still in the middle of its historical range, this suggests that smaller gold miners are more volatile.
With recent increases in profitability and performance from many companies in the gold exploration industry, gold stocks are worth keeping an eye on for many investors, even if they are not a must-buy right now. Many gold stocks have reasonably promising growth prospects and fundamentals. Even after recent significant increases, I believe gold ETFs are still worthwhile investments. With the current global economic turmoil, elections coming, and interest rates apparently guaranteed to fall shortly, there is every reason to expect that the performance of these gold trusts will continue to improve.
The increasing focus on portfolio diversification has led to a renewed interest in gold investments. Financial advisors and wealth managers are increasingly recommending gold stocks and ETFs as part of a well-balanced investment strategy. This trend is driven by the recognition that gold can provide a hedge against market volatility and currency fluctuations. As more investors seek to optimize their portfolios for long-term stability and growth, the demand for gold-related investments is likely to remain strong, potentially supporting higher valuations for gold stocks and ETFs in the coming years.
Gold stocks and ETFs provide various ways to obtain exposure to the precious metals market, each with their own set of advantages and disadvantages. Gold stocks allow you to invest in mining and exploration firms' operational success and performance. Gold ETFs provide a more direct and liquid way to invest in gold, allowing you to track price changes. The latest advances in gold are a reaction to the current economic and geopolitical environment. Whether through equities or ETFs, gold has proven to be an important part of investors' portfolios for a variety of reasons, as detailed in this article. This industry shows no indications of slowing down anytime soon, and investors should take note of the opportunities that lie ahead.
