Gold has been on a roll as of late and has caught investors’ attention as experts predict its price could soar to highs of $2,000 an ounce within the next two years.
While most pundits link geopolitical events with changing gold prices, this author is firmly convinced that rather than a barbarous relic, gold is reflecting the end game of our monetary policy. With $14T, that’s trillion with a T, in negative yielding sovereign debt globally, we believe the central bankers are in a no win situation. In normal times, the Keynesian model, the central bankers would lower rates and issue debt to stimulate the economy at the bottom of the business cycle. In good times, rates go back up and the government pays back the debt and at the end of the business cycle – the government has zero extra debt. However Japan central bankers were the first to explore printing money ad infintatum in a deflationary environment and they really have yet to exit it. Consequently they are now the second largest debtor in the world and if interest rates were to rise just 1% – 80% of the tax revenues would go to servicing debt – essentially they’re bankrupt.
Now the Euro Zone is following quickly with almost every country yielding negative returns. It is so warped that Italian corporate debt is yielding less than UST. Crazy right?!
Guess what – YOU CANT PRINT GOLD. After many years of nonchalance, central bankers are now stockpiling gold with China leading the way. “For thousands of years, gold has been recognized worldwide as the ultimate means of trading and storing wealth,” said Anne Jessopp, chief executive of the Royal Mint. Just talk to the people of Turkey, Venezuela, Argentina, Russia where the local currencies have depreciated considerably and sometimes even collapsed in recent years. Had those people sold their local currency and reinvested into gold – their purchasing power would have remained intact.
There used to be the argument that since gold yielded zero and bonds yield positive interest – sovereign debt was preferred because of the positive carry. Fast forward to today and gold yielding zero is actually a great alternative investment. There is no counterparty risk and is an attractive store of wealth. Gold is considered impervious to the actions of the central banks even in times of economic uncertainty
So, whats the best way to hedge your portfolio with gold?
Invest in exchange traded Funds (ETFs)
These are passive exchange funds that purchase gold bullion to the value of the underlying assets of the fund. The exchange fees, storage costs and insurance are built into the daily price. Of course there would be a broker commission to pay but with online brokerages these days – it’s a relatively small cost. The Gold ETFs tend to track gold spot price fairly accurately . There are leveraged Gold ETFs which can be 2X or 3X – in a rising market one can make a small fortune but in a falling market you could get wiped out. As well, with the financial engineering of this type of ETF, in a flat directionless market the hedging fees will eat up your capital.
Buy physical gold
Investors can buy the real thing in the form of gold bars in various denominations, which are widely available. Coins are a little tricky because of the potential numatic premium in some of the coins, however there is a liquid market for these and you can sell coins privately. However, investors need to consider the cost of security and storage, insurance and delivery charges. It is possible to buy and sell gold via online trading platforms such as bullionvault.com, which will match investments with physical gold bullion held in vaults.
3 Invest directly in gold shares
Those prepared to take on more risk could consider investing directly in shares in gold miners. The advantage is that a shareholder gets some operational leverage as gold prices rise. As the gold price rises, that will translate into much higher profits for the company and consequently the stock can rise quite dramatically. The flipside is that if the gold price drops, these companies can potentially lose money and the stock can drop precipitously.
For the highest risk/reward the EXPLORATION companies have the biggest bang for the buck. As the company is exploring – when they hit paydirt the stock can go a little crazy , potentially making shareholders a lot of money for the risk
For a lower risk profile but still good a good risk/reward profile are the PRODUCERS. Simply these are companies who have already found a deposit of gold and are mining it. The higher the gold price goes, the more money the company makes – the higher the stock goes. John Newell, portfolio manager from Fieldhouse Capital says “miners fortunes are closely linked to the gold spot price. When prices are high and rising, the market rewards those companies who are mining successfully and finding new deposits – often the highest returns in the gold sector are found in these companies – fortunes have been made. However when gold prices fall, it can be very painful”
4 Consider gold funds
Given the unpredictability of the sector, another option could be considering a more diversified fund of gold miners, such as BlackRock’s Gold & General fund or the JPM Natural Resources fund. Funds offer greater diversification as they invest in a portfolio of gold mining companies chosen by fund managers — meaning they also have ongoing charges, typically around 1-3 per cent.
Investors should also be aware that such funds do not solely invest in gold miners and tend to have exposure to other precious metals. Likewise, gold miners are unlikely to be solely involved in mining gold, and will produce other resources. So there is no guarantee that their share prices, or the price of fund units, will replicate gold price movements
If you’re looking for some good ETFs, gold stock and/or mutual funds – drop us a line and we’ll give you our top picks for the week!
