Its not too late to buy precious metals
With gold hitting all-time highs across the past week, many investors are asking: ‘have I missed the move?’ While it might seem like buying in now is buying in at the absolute peak, there are many reasons to believe that gold will keep rising.
Indeed, the positive economic and regulatory settings for gold have caused Bank of America to lift their target price for gold across the next 18-months to $3,000 USD/ounce, more than fifty percent higher than current prices.
Precious metals, and particularly gold prices have historically risen with increases in economic uncertainty. This is because the value of other economic assets can drop very quickly during such times. Precious metals have historically not fallen in value during these times however, and as a result, there is a flood of demand for gold as other assets fall and this instead pushes prices higher.
One of the reasons why gold is seen as such a safe store of value is its scarcity. Rarely does the value of gold see large falls because there is simply not enough of the metal to flood the market and push prices down. Believe it or not, all the gold ever mined would fit inside two Olympic swimming pools, it most likely all came here from asteroids or meteors, and nearly half of it has come from just one spot.
Up until now, gold has consistently been recycled, with some of the gold in your wedding band potentially forming part of a roman coin thousands of years ago. However, for the first time ever, significant amounts of gold are starting to be consumed. Modern electronics, which use gold for its conductivity, now account for a significant amount of the world’s gold consumption and much of this gold cannot be recycled. Additional medical and dental applications also increasingly consume gold, with most of this also going unrecycled.
There is simply a low supply of gold out there and those who have studied basic economics will know that low levels of supply and strong levels of demand is a recipe for rising prices.
So why has gold popped now? Sure, gold has been rising for a couple of years, but the pace of gains has accelerated during the COVID-19 period. Part of this is linked to the economic uncertainty that the virus has brought about, but this is only a small part of the story.
The biggest driver of gold prices has been the monetary policies brought about because of the virus, with fiscal policies also helping to push precious metals prices higher. The low interest rates of the current monetary policy settings have made gold’s inherent lack of yield far less of an opportunity cost compared to a cash deposit. When interest rates are high you are giving up a strong yield on cash by holding gold, but when interest rates are at or near zero, you are not giving up much at all.
The current bond buying practices (also known as quantitative easing, QE) of the monetary authorities is also helping to push gold prices higher. QE increases the amount of cash in the hands of investors, while also making it less attractive to hold bonds (as bonds are bought up by the monetary authorities, it forces the yield of those bonds down). There are also arguments that these bonds become too expensive relative to the amount of risk they represent due to the quantitative easing.
The fiscal policies of governments have also worked to increase the amount of cash available to investors looking to buy gold, therefore helping to push up gold prices.
These policy settings are causing inflation. It may not be the consumer price inflation that is traditionally though of, but rather risk asset price inflation. Some believe that this inflation will eventually flow through to consumer prices, but other remain unconvinced. Regardless, asset prices have risen, and currency is buying you increasingly less of these assets. Gold is a hedge against further inflation because it is also being inflated in cash terms.
It can be hard trading precious metals, especially when there is a shortage of the physical metals available to most potential buyers. Anecdotally, those going to gold and silver brokers have had a hard time actually getting their hands on the metals and those who have been able to have generally paid a premium to market price.
After purchasing physical metals, you then must store them and when you are ready to sell, there comes another round of potential headaches.
A simpler way of trading precious metals is to use ASX-listed mini warrants or exchange-traded funds (ETFs). These will give you exposure to the underlying spot or futures markets in the metals, allowing you to get market-accurate pricing, as well as leverage to make your dollars go further. Additionally, you will not need to worry about storing the physical metal.
Be careful when offered unlisted or unregulated financial products that are supposedly tied to the price of gold, your investment may simply be making others rich.
If you are interested in learning more about trading in precious metals, please do not hesitate to contact an Emerald Equities Advisor on 03 8080 5777 or learn more at www.emeraldequities.com.au.
The Emerald Financial traders and portfolio managers recently ran a webinar that covered this topic plus the trades they’re keen on this Reporting Season. Investors can watch the recording by clicking here.
Sam Green is the Portfolio Manager at Emerald Financial, whilst also being an Equities and Derivatives expert for his clients at TradersCircle.
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