Gold has recently reached record highs, propelled by geopolitical tensions and economic uncertainties. Some analysts anticipate gold prices to strengthen further in 2024, underpinned by safe-haven demand and the evolving outlook for US interest rates. Under the current economic climate, the inclusion of gold in your investment strategy can offer unique advantages.
Factors Determining Gold Prices
Before investing in gold, we should first understand the factors that determined the price trends of gold:
Real interest rates
“Gold is highly correlated to real interest rates,” says Bruce Liegel, a macro fund manager and author of the newsletter Global Macro Playbook. “When real rates are negative, it drives gold higher as negative rates drive the liquidity engine for investment, and eventually inflation. When real rates go positive, it tends to be a braking mechanism for the economy, reducing demand and ultimately lowering inflation.”
Value of the US Dollar
Gold is primarily denominated in US dollars, meaning its value is quoted in terms of the American currency. Dollar-denominated assets generally exhibit an inverse relationship with the US dollar’s value. Consequently, a decline in the dollar's value tends to lead to an increase in the value of gold, and conversely, a rise in the dollar's value may result in a decrease in gold prices.
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Demand for gold
As a commodity, gold's price trajectory is also highly influenced by fundamental demand. These demand drivers can be broadly categorized into four primary segments:
(i) Investment Demand
Gold's status as a traditional safe-haven asset attracts investors seeking protection against economic uncertainties, political turmoil, and currency fluctuations. During periods of heightened risk aversion, investors flock towards gold, increasing its demand and pushing up its price.
(ii) Central Bank Demand
Central banks worldwide frequently maintain gold reserves as a strategy to diversify their portfolios and safeguard against external economic shocks.
“Central banks, particularly those of Russia, China and India, have been large purchasers of gold over the last five to 10 years,” says Liegel in his newsletter Global Macro Playbook. “All three of these countries are now part of the BRICS currency that will be backed by gold. As central banks buy gold, it also pushes up the price.”
(iii) Jewelry Demand
Gold's aesthetic appeal and symbolic significance have made it a prized material for jewelry creation for centuries. The continuous demand for gold jewelry, particularly in emerging economies with growing middle classes, serves as a substantial source of demand, influencing gold prices.
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(iv) Industrial Demand
Gold's unique properties, including its malleability, resistance to corrosion, and high electrical conductivity, make it a crucial component in various industrial applications. The demand for gold in electronics, dentistry, and other industrial sectors contributes to its overall demand and price dynamics.
Why Invest in Gold
Gold serves as a hedge against economic uncertainties, offering a safe haven for investors during times of market turbulence. Its limited supply and enduring value contribute to its role as a store of wealth, protecting against inflation and currency fluctuations. Additionally, gold has a low correlation with other assets, making it an effective diversification tool for portfolios. As a tangible and universally recognized asset, gold provides a sense of security and stability, making it an appealing choice for those seeking to preserve and grow their wealth over the long term.
How to Invest in Gold
When considering gold investments, several avenues are available to investors:
(1) Gold ETFs:
Overview: ETFs are an accessible option for investors familiar with traditional markets.
Mechanism: Gold ETFs trade like regular stocks and reflect the value of physical bullion held by the ETF provider.
Advantages: No need for physical storage, and annual management fees are relatively low.
Considerations: Gold ETFs typically have fees around 0.20-0.40% of assets.
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(2) Individual Mining Stocks:
Overview: Investing indirectly through stock in mining companies provides exposure to precious metals.
Mechanism: As precious metals prices rise, the value of mining companies may also increase.
Options: Buy stock in specific mining firms or opt for ETFs that diversify across gold mining companies.
Fees: Mining ETFs may have slightly higher costs compared to bullion ETFs.
(3) Physical Bullion:
Overview: Direct ownership of physical gold in the form of bars and coins.
Mechanism: Purchase from online sellers or physical stores, with the bullion shipped to you.
Considerations: Physical bullion may be considered collectibles, and prices can be higher than the spot price.
Storage: Safely storing bullion at home or in a depository incurs additional costs.
Conclusion
Investing in gold is a strategic move that can fortify your portfolio against economic fluctuations. Understanding the diverse methods available allows you to tailor your approach to align with your financial objectives. Whether you choose the convenience of ETFs, the potential growth of mining stocks, or the tangible ownership of physical bullion, these precious metals can play a vital role in diversifying and strengthening your investment portfolio.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
