Gold-Digging Your Way Out of COVID

THE BRIEF

Millennial Robinhood traders aren’t favoring gold but that doesn’t make it a bad investment.

• Gold prices rose to its highest in 9 years well above $1,800/oz. Bank of America estimated gold prices will rise to $3,000/oz over the next 18 months.
• In 2020, gold outperformed the S&P 500 with a 17% gain compared to a 2.6% decline.

THE EXPLANATION

Investors often use the shiny commodity as a hedge to protect their portfolio from a potential downturn in the market. In 2007, the stock market lost over 55% within two years while gold gained over 30%.

Due to COVID, demand for gold dried up in two of the largest gold importing countries, China and India. In April and May, India reduced its gold imports by 99% while China reduced its imports by over 70%. However, strong demand from the US and Europe made up for the collapse in imports from China and India. Gold prices could further increase if demand picks back up in China and India.

In 2020, gold’s outperformance was driven by two factors:

• Fear… When the world panics, investors rush to gold investments as a hedge for its enduring value. Uncertainties in the economy and stock market pushed investors into gold investments and drove up its price over the past several months.
• High inflation expectations… Gold is used to protect investors against high inflation. The trillions of dollars pumped into the economy by the US government could potentially lead to a period of rising inflation (TAJ: Risk of rising inflation).

How could gold backfire on investors? The price of gold could drop if the economy recovers at a faster pace, inflation falls, and demand for gold consumption drops.

THE ACTION

Investing in gold ETFs and gold miners could save you the hassle of owning a bar of gold.

• SPDR Gold Shares ($GLD) is the largest gold ETF in the world that tracks the price of gold.
• Three largest gold miners in the world: Barrick Gold ($GOLD), Newmont Corporation ($NEM), and Kinross Gold ($KGC).

Investing in gold mining companies have a higher risk than investing in a gold ETF and with higher risk comes higher reward… or loss. A 10% increase in the price of gold could mean a much greater than 10% increase in the stock of a gold mining company.

• In addition to changing gold prices, gold mining companies have operational, regulatory, and company-specific risks to worry about.
• Gold is also known to be a cyclical investment where its value will fluctuate up and down based on different economic factors (i.e interest rates, economic cycles, etc.).