Gold is often considered a safe asset in times of economic uncertainty. Metal has been used as a medium of exchange for thousands of years in different countries, and has practical use in industrial applications, dental or medical procedures, and jewelry. Gold is seen by many investors as a tool to offset the effects of inflation or low interest rates, so the public interest in gold as an asset has increased in 2020 as economic conditions deteriorated.
Spot gold prices have risen 32% in the past 12 months and 24% so far this year in a clear reaction to the global recession and strong central bank activity. This places the metal in a maximum of 9 years.
Gold bars can be purchased from a number of reputable dealers, or investors can opt for a service that stores bars remotely. However, it may not be practical for most people to participate in the physical gold market due to challenges with security, exchange and transportation costs, or functional liquidity; If you have real gold, selling it requires physical transportation to a buyer and price negotiations. Alternative solutions include stocks and ETFs that provide very similar performance with more convenient features.
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Test a security instead of a metal bar
Investors can buy highly liquid ETFs that provide indirect ownership of physical gold thanks to several popular and efficiently managed ETFs. The SPDR Gold Trust and the iShares Gold Trust Both are large funds with reasonable expense ratios that track the spot price of gold. Those ETFs have returned 42% over the past year and 20% so far this year. There are many other funds that have physical gold but offer different options in terms of leverage, storage locations and other features. Investors should note that the long-term gains on these ETFs are taxed as collectibles, which have a much higher tax rate than most other capital gains.
Owned by gold producers
Mining stocks are another method of gaining exposure to gold prices without buying gold. These companies are dedicated to the acquisition and development of properties, as well as the extraction of gold. They have rights to the minerals in the soil, and their cash flows are dictated by the prices that the products of mining activities can sell. Therefore, the value of many mining stocks increases and decreases with market prices for precious metals.
Some of the largest gold mining companies include Newmont Barrick Gold, Franco-Nevadaand Wheaton Precious Metals. There are also popular gold mining ETFs for investors who favor diversification or lack the time and experience to conduct research on individual companies. These include the VanEck Vectors Gold Miners ETF, Sprott Gold Miners ETFand iShares MSCI Global Gold Miners ETF.
Exposure to gold miners undoubtedly provides a strong correlation with the physical performance of gold, but these do not serve as a perfect proxy. In the long term, mining stocks have been more volatile and have yielded lower returns than gold. However, stocks tend to outperform physical gold during extended bull markets as their prices rise along with companies in other sectors.
This divergence is attributable to several factors. Not all gold mining companies are called “pure games,” meaning they also deal with other metals that affect operating results. In addition, these are real-world companies that have stock prices influenced by different aspects of running a business, such as labor issues, debt management, improvements in operating efficiency, and competitive factors. All of these events cause stocks to fluctuate in price regardless of the performance of gold.
Ultimately, owning physical gold may be a convenient and preferable option for many investors, but for most, better alternatives exist. Whether you are using ETFs to gain indirect exposure or using mining stocks, there are dozens of viable options that can be implemented in your investment strategy.
