ETFs
How to invest in gold now
Last month, the spot price of gold hit a record 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, returning around 25% over the past seven months.
“Gold has already metabolized the Federal Reserve’s expected reduction in monetary policy easing prospects for 2024, but it continues its upward trajectory,” explained Ned Naylor-Leyland, manager of the Jupiter AM 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 purchases could be driven by a confluence of reasons, including inflationary concerns and growing geopolitical tensions in the Middle East.
Interestingly, $15.6 billion of client funds have been withdrawn from precious metals exchange-traded funds (ETCs) over the past year, most recently at a record monthly rate in April. Amid such profit-taking, these investment vehicles are clearly not the drivers of the global rise in gold prices.
Who buys all this gold?
China has become one of the largest buyers of gold in the world. 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% year-on-year increase in demand in January 2024.
“Behind China’s record demand, an interesting demographic shift is occurring,” Ned Naylor-Leyland continues in his April 30 report. “Younger buyers, aged 25 to 34, increased their share of total gold purchases from 16% to 59% in 2023. The decline in stock market and local real estate values contributed to the rise in power of the younger generation, but it is the form of investment that indicates the true nature of demographic change. Young buyers in China choose to buy 1 gram grains of gold to preserve their wealth in the long term.
Such high demand could remain confined to Asia for longer. 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 again for investors.” American investors 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. Looking ahead, we should not expect similar further growth. For us, investments in gold are not focused on returns, 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 risen sharply, the stock prices of companies that mine and trade it have been slow to follow.
A simple comparison of two ETFs from the same fund house exposed to these two asset classes, the iShares Physical Gold ETC and the iShares Gold Producers ETF, highlights this gap: over the past year, the former gained 17.7%, while the latter gained 17.7%. only 2.5%.
On the other hand, something appears to have changed over the past three months, with the iShares physical gold ETC up 14.4% and the gold mining stock ETF up 20.4%. .
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 stocks catch up with gold prices
“After years of undervaluation relative to 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, gold and precious metals portfolio manager at VanEck.
“The industry’s top performers 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,” Casanova continued 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 significantly expand their reserve base and deplete their resources, companies generally must acquire other companies or assets. All things being equal, the more advanced a project is, the higher its valuation and the more quickly the company develops.
This story was originally published in Italian May 6, 2024
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