The price of gold glittered in early 2016, soaring 17 percent in the first quarter and trouncing returns in major stock and bond indices.
Global investors pumped money into the gold market, a traditional safe-haven investment, early in the year as equity markets crashed in a short-lived correction. Stocks have since recovered, but gold hung onto most of its gains.
Gold soared to a 13-month high in February, climbing just above $1,280 per ounce. The rising price trend in gold is being supported by a variety of factors, according to the World Gold Council. These include concerns about emerging market growth, a hiatus in the U.S. dollar's rise, negative interest rate policies at leading central banks and investment demand.
The key question for investors, of course, is can the rally in gold continue? Gold is viewed as a hedge against market instability and declines and is also viewed as an alternative currency by some. In 2011, the price of gold hit an all-time high just above $1,900 per ounce.
There are several reasons bullish analysts believe gold can continue to shine.
Investment demand for gold has been climbing amid concerns over the move to negative interest rates in the eurozone and Japan. Central banks have pushed some key interest rates into negative territory in an effort to stimulate economic growth.
“Central bankers have embarked on an extremely risky endeavor,” says Sol Pahla, senior financial analyst at Tacticalinvestor.com.
European demand for gold has picked up over the last two years as the Greek debt crisis continues to linger, says Henry To, partner at CB Capital in Newport Beach, California.
“The ongoing threat of a Greek exit from the eurozone, combined the European Central Bank actively easing policy by expanding and extending its recent asset purchases to include corporate bonds, has made European investors even more skittish about the value of its currency, the euro. Europeans will likely increase their purchases of gold as an active diversification tool,” To says. “The same thing is occurring in Japan, where gold purchases are near a seven-year high.”
Chinese and Indian demand for gold remains strong. Chinese and Indian demand makes up more than half of all global demand every year, mainly in the form of jewelry, To says. “In the fourth quarter of last year, Chinese consumer demand for gold increased by 3 percent year over year; for India 6 percent year over year.”
The rising wealthy middle class in China, which is now the world's largest, is another positive factor for gold, Pahla says.
“China is home to the most billionaires in the world. The Chinese have a strong affinity for gold and as their wealth increases, they will deploy increasingly large sums of money into gold,” he says. “Asia will be the epicenter of economic growth for many decades to come. Asians are savers in general and tend to all favor gold, so this one development is a significant factor in favor of gold in the long run.”
This story originally appeared on U.S. News & World Report by Kira Brecht on April 12, 2016. View article here.
Some analysts make a case that there could be room in an individual's portfolio for an allocation toward gold. Gold has historically acted as a strong diversification tool for the average U.S. investor, To says.
“Gold tends not to move in the same direction as U.S. stock prices, which means it provides a cushion for investors during times of stock market corrections,” he says. “Over the last 45 years, U.S. stock prices were in downtrends or corrections during 10 of those years, or about 22 percent of the time. During that time, gold outperformed the S&P 500 by 45 percent on an annualized basis.”
Here are ways an investor can add exposure to gold in their portfolio.
Gold coins. If you have an affinity for something you can put under your mattress gold coins might be the right choice for you.
Purchasing gold coins is much easier than it used to be, To says. “You can find many certified and trustworthy dealers over the Internet. One-ounce American Gold Eagles would be your best choice, as its premium or the price you are paying in excess of the monetary value of the gold content is minimal at this weight.”
Exchange-traded funds. There are several ETFs that offer individual investors exposure to gold, such as the SPDR Gold Shares (ticker: GLD). “Shares in the GLD ETF represent fractional interests in the SPDR Gold Trust, which are backed by physical gold bullion and cash,” To says. The fund has a minimal annual expense ratio of 0.40 percent.
Gold mining stocks. These are other options for investors to consider, but are not simply a pure gold price play as they carry company specific risk as well. Gold mining stockshave surged this year. One measure of gold mining stocks is the Market Vectors Gold Miners ETF (GDX), which has posted an explosive 51percent year-to-date return. The massive price run-up means investor need to be choosy about gold mining stocks.
“Given the rapid rise of gold prices in 2016, we see fewer opportunities among gold miners than just a couple of months ago. We believe Eldorado Gold Corp. (EGO) and Goldcorp (GG) present the most attractive price/fair value discount in our coverage,” says Kristoffer Inton, equity analyst at Chicago-based Morningstar.
The firm pegs “fair value” for Eldorado at $4.70 and at $23 for Goldcorp.
To also likes Goldcorp as a long-term investment.
“Goldcorp is one of the few major gold miners that will grow its production in 2017 and 2018. Its mines are located in areas of low geopolitical risk in North America and South America,” he says. “Also, it's all-in-sustaining-cost of production is less than $900 an ounce, which puts it at the low-end of the global cost of production curve for gold miners.”
At the end of the day having some gold related assets as part of your portfolio could act as a type of insurance.
“Prudence dictates that one have a core position in precious metals,” Pahla says. “You don't purchase insurance on your home because you know your home is going to burn down. You purchase it because in the event it does burn down, you are protected. Gold bullion should be viewed along the same lines.”
