Why Invest in Precious Metals
Although most commonly associated with jewelry and coined money, precious metals are actually far more valuable as industrial components. Various precious metals can: conduct electricity, control heat, maximize chemical properties, and so on.
We can’t function without GOLD
Much of the electronics industry relies on gold to function in many of its components, while platinum is an integral resource used throughout the medical field, computer and auto industries. In terms of raw materials and oil refining, palladium is key.
Aside from the intrinsic value held by these metals due to their widespread industrial purposes, investing in these metals serves as a protection from inflation. Considering that inflation is increasing globally, on the whole. The prices of precious metals will likely continue to appreciate against the dollar, so having a hold on metals makes a logical risk hedge. Thus, precious metals are a long-term investment that holds the ancillary benefit of appreciation.
The 3 Strategies to Investing in Gold and Precious Metals
In terms of your investment portfolio, there are three purposes that investing in precious metals serves:
- Strategic asset allocation
- Risk management
- Tactical asset allocation
Gold Is Soaring Along With Stocks, Here’s Why
The stock market remains on a seemingly endless bull market run since the March lows. With this, investors would typically expect gold to perform poorly. Many traditionally view gold as a “safe haven” asset that sort of muddles along during good times. However, it outperforms in a time of crisis as investors look to protect their wealth.
So it’s been a bit of a surprise to see gold up by 18% this year. It’s also closing in on an all-time high while the stock market has rallied.
But gold’s performance this year has little correlation to how the stock market is performing. Additionally, it has more to do with interest rate policies around the world.
Gold in the Current State of the Economy
Here in the US, economic activity has ground to a halt due to the coronavirus pandemic. Because of this, the Federal Reserve pushed interest rates to near-zero. Other central banks around the world have done the same. Also, a few have turned to negative interest rates in an effort to boost their economies.
When you add in inflation, it means that investors here in the US who own gold aren’t missing out on the trade-off between holding gold – which always offers no yield – and earning a yield from bonds.
“As real yields turn negative, opportunity costs for holding non-yielding assets essentially vanish, particularly when viewed through the historical lens of fiat currencies and their purchasing power. This provides a continued tailwind for gold,” said Jeff deGraaf, chairman of Renaissance Macro Research.
Gold closed as high as $1,820 an ounce last week, its highest price since September 2011.
Georgette Boele, a precious-metal strategist at ABN Amro, agrees with deGraff. She says gold is moving in lock-step with stocks. Boele also mentions that gold is acting more like a “risk-on” asset instead of its usual role of a “risk-off” investment. She says this is due to low interest rates.
She adds “Firstly, central bank policy is a strong driver behind higher gold prices. Not only are official rates close to zero in a large number of countries, they will unlikely go up in our forecast horizon,” and says that all of the money printing by central banks around the globe “sounds like music to the ears of gold bugs as money floods into the market and currencies begin to decline.”
A Very Bullish Signal
Boele says it’s a very bullish signal for gold prices that investors have bought every dip by the precious metal during the rally.
“Now the psychological resistance of $1,800 per ounce has been surpassed. It seems that investors will only be satisfied if the former (intraday) peak in gold prices at $1,921 per ounce is reached and taken out. Above that, the important psychological level of $2,000 per ounce is within reach.” she said.
Boele’s employer, ABN Amro, has raised its year-end gold target from $1,700 an ounce to $1,900 an ounce. ABN Amro also says any dip in gold prices should be bought.
“We still expect a sizeable correction in gold prices in a risk off environment when the dollar is back in favor. It is likely that this correction will be short-lived and be a buy-on-dips for investors eagerly waiting to step in,” said Boele.
Here’s How To Safely Buy Gold
Gold prices have climbed in the past month, and that shouldn’t come as a surprise. With the Fed printing trillions of dollars as it attempts to offset the economic damage brought on by the coronavirus pandemic, investors have sought the safe haven of going to buy gold to protect their wealth.
Since hitting a low around $1480 per ounce back on March 19, gold has climbed to as high as $1740 an ounce recently. This shows a rise of 17.5% in less than a month.
Not bad for an investment that many use as a store of wealth.
The last time the Federal Reserve printed vast sums of money in an attempt to pull the country through an economic slowdown was 2007 through 2011.
Gold was around $650 an ounce for most of 2007, and as the Fed printed more money, gold hit a high of $1900 an ounce in late 2011.
That’s a gain of nearly 200% in a little more than 4 years.
If, like us, you expect the Fed to continue printing money and are looking to buy gold as either a store of wealth or as an investment, here are the different ways you can own the precious metal.
Gold bullion can be bought online or in stores (coin dealers, pawn stores, etc.). It can be acquired in either gold coins or gold bars. Coins are generally easier to transact with due to their wide acceptance and greater liquidity.
Gold coins are referred to as either a “sovereign” coin or a “round.” Sovereign coins are minted by a government and carry an implied guarantee of their face value. The most common sovereign coins are the 1-oz. Canadian Maple Leaf and 1-oz. American Eagle. Other popular coins are the American Buffalo, South African Krugerrands, Austrian Philharmonic and Chinese Panda.
“Rounds” are produced by a private mint and carry no face value. Here in the US, an example would be gold coins produced by the Franklin Mint. These coins are less popular than sovereign coins but still trade fairly easily.
“Numismatic” gold coins are rare coins that aren’t valued on their gold content but rather their rarity and condition. These are typically only bought by collectors as they can trade for significantly more than the spot price of gold based on demand. Unless you plan on becoming a collector, it’s best to avoid buying numismatic coins.
Gold bars are available in both gram and ounce weights, depending on your preference and budget. Nearly all gold bars will be from private mints.
When it comes to investing in gold via the stock market, an investor has a few options. You can buy gold ETFs (exchange-traded funds) that track the price of gold. The benefits include ease of buying and selling as well as liquidity of the market.
The most popular choices are the SPDR Gold Shares ETF (GLD) and iShares Gold Trust (IAU). These two both seek to reflect the price of gold bullion.
You can also invest directly in large gold mining companies like Newmont Corp (NYSE: NEM), Barrick Gold (NYSE: GOLD) or Kinross Gold (NYSE: KGC). Or you can invest in junior mining stocks, which are typically much more speculative and offer a greater risk-reward. Some options here are Eldorado Gold (NYSE: EGO) and Pretium Resources (NYSE: PVG).
Alternatively, you can also buy ETF for gold miners like VanEck Vectors Gold Miners ETF (GDX) or VanEck Vectors Junior Gold Miners (GDXJ).
There are also leveraged ETFs, which offer 2x or 3x the leverage, but we won’t discuss those here.
As we mentioned earlier, with the Federal Reserve printing money at an unprecedented rate, there are plenty of reasons you should have gold in your portfolio. You can use it either as insurance to protect your wealth or as an investment to generate profits. Research the different options and choose the one that best fits your investment goals.
Gold Becoming ‘Unavailable’ Due to Overwhelming Demand
If you can find gold coins or gold bars available for purchase, it might be a good idea to get your hands on them.
Major gold dealers are reporting that gold bars and coins are virtually unavailable right now as investors flood into the precious metal as a safe haven.
Yesterday, Kitco announced that it is almost completely sold out of the most common one-ounce gold coins. American Eagles and Buffaloes from the U.S. Mint are out of stock. The same goes for Canadian “Maple Leaf” coins, Great Britain’s “Britannias,” Australia’s “Kangaroos” and South African Krugerrands.
Josh Strauss, a partner at Pekin Hardy Strauss in Chicago says “There’s no gold. There’s roughly a 10% premium to purchase physical gold for delivery. Usually it’s like 2%. I can buy a one ounce American Eagle for $1,800… $1,800!”
The U.S. Mint does have American Eagles for sale, but they are listed at $2,175 for a one ounce coin, a massive 33% premium over yesterday’s spot price of $1,630 per ounce.
Ludwig Karl, a board member of Swiss Gold Safe Ltd., said “It’s absolutely crazy what’s going on. Right now, if somebody wants to buy gold, I wish them all the best in finding it. Most of the bullion dealers are closed.”
Debra Thomson, sales director at IBV International Vaults, added “The last time I saw this amount of chaos in the market was with 9/11.” IBV offers safe-deposit boxes and the purchase of precious metals worldwide.
And Seamus Fahy, co-founder of Merrion Vaults, says “A buyer would have been fussy about the coins they want two months ago. Now they will buy anything they can get their hands on. They are desperate to get physical gold.”
If Goldman Sachs strategist Jeffrey Currie is right, gold coins will continue to be scarce as demand skyrockets over the coming months with every newly-announced government stimulus plan.
During this month’s massive selloff, gold initially dropped as well. It did the same thing at the beginning of the 2008 financial crisis, dropping around 20%. But in November 2008 when the government announced the first of many quantitative easing plans, gold stabilized and climbed higher.
Currie believes that with the announcement last week that the Federal Reserve would start buying $700 billion worth of Treasurys and mortgage-backed securities, once again we are mirroring what happened in 2008, and that means gold’s massive rally is likely underway.
Not only could the Fed’s quantitative easing measures send gold prices soaring, the supply imbalance will likely get worse, adding more fuel to the fire.
Switzerland’s refining industry, which is a major international hub and has three of the world’s largest refiners, is shut down in an effort to slow the advance of the coronavirus and mines across the globe are seeing production slow or come to a complete halt as governments close anything deemed non-vital in the wake of the outbreak.
“There’s no gold” is likely to become a common refrain in the coming months.
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