Thinking of Long Term Investment? Gold Could be the Best Choice

The financial market is on everyone’s mind, especially with the 800-point drop in the Dow on Wednesday. It was recorded as one of the worst days in the U.S. stock market this year. When troubling times hit, investors tend to scramble for security.

Building a Strong Portfolio

The ideal deal for many investors is, for high returns with no or minimal risk. However, only the inverse is true. Hence a good way to deal with market risks is to hedge your investments. Long term investments are a great way to limit the volatility of the stock market and the risks involved in investing. You can build a portfolio with a mix of high risk and low return investments for a stable journey.

Gold Is an Investor’s Safe-Haven,

According to Marc Faber renowned global investor, and author of The Gloom, Boom & Doom report, “Investors should lower their long-term return expectations from the equity market.” He advised investors to start adding gold to their investment from a long-term perspective amid global growth concerns and heightened trade tensions. Marc Faber also expects gold rises by about 20% over the next 2-3 years. (1)

The Need of Gold

Gold, normally, flourishes as a safe-haven in times of uncertainty. Global trade wars, tensions between Iran and western nations, and slowing global economies are all adding to a feeling of uncertainty. The need for gold is the most common and deep-rooted commercial instinct of the public. In times of insecurity and ambiguity, this instinct becomes even more prominent.

As per Arkadiusz Sieron, “The more distant future is not all clear cut, yet gold finds itself in a more positive environment fundamentally, translating into fewer headwinds. The interest rate cut would work to ease upward pressure on the U.S. dollar, stimulating demand for gold. Moreover, the Fed’s move should add to the recession fears. If everything was rosy, the U.S. central bank would not reduce interest rates. Such worries should drive investors to safe havens such as gold.” (2)

Gold and The Economy

Gold prices have stayed true to their upward trend and have now risen 18% so far this year, as fears of a recession loom large. In the previous week, the U.S. yield curve inverted, laying the framework for the yellow metal to shine even brighter. While the inverted curve is commonly considered a warning that the US economy is headed for a recession, some specialists have contended this view.

Nonetheless, the performance of the gold market suggests traders and investors are seeking refuge in the precious metal. The current gold price rise also indicates that investors are diversifying their portfolio with the rising fear of a global recession, although technically recession is not today’s reality.

According to Frank Holmes, “If you believe negative rates are a real possibility, an allocation to gold and gold stocks might make a lot of sense right now. In the past, gold prices have surged when real yields fell into negative territory. (The real yield is what you get when you subtract the annual inflation rate from a government bond yield.) This is why I always recommend a 10 percent weighting in gold, with 5 percent in gold bullion, the other 5 percent in gold stocks, mutual funds and ETFs. Remember to rebalance at least annually!” (3)

Uncertainties about the global economy have built up primarily because of the US-China trade war. The escalation and de-escalation of US-China trade pressures and the change in US real interest rates are the main elements that have contributed to the gold prices in recent days. They are also the most likely to continue prompting the holdings of financial investors.

Ways to Invest In Gold

As per Annie Nova, “And putting just 5% of your portfolio in gold can do a lot to carry you through market plunges, said Joseph Foster, manager of the Van Eck International Investors Gold Fund. “A small portion hedges against a larger portion of your portfolio against financial risk,” Foster said. And he said the “good times for gold could continue: “We’ll see gold much higher than it is today if we go into a global recession.” (4)

With investor interest rising in the precious metal, here are some options available for investing.

1.      Gold Receipts

It is speculated that one of the earliest forms of credit banking was when goldsmiths would store large quantities of gold and issue a receipt in exchange. Surprisingly, it is possible to invest in gold receipts even today. These receipts can later be redeemed for physical gold. There are some enterprising private “mints” who deal with gold; however, most government mints do not deal privately with gold anymore.

For instance, the Royal Canadian Mint offers electronic tradable receipts (ETRs) supported by their vaulted gold, as well as collectible coins. These ETRs can trade on an exchange or change hands privately and follow the price of the gold that backs it.

2.      Derivatives

Derivatives markets use gold as the underlying asset. They are contracts that allow for the delivery of the gold at a future date. Popular instruments include:

  • Forward Contract
  • Future Contracts
  • Call Options

3.      Digital Gold

This is a facility offered by MMTC-PAMP Pvt. Ltd., a joint venture between MMTC Ltd. and Switzerland-based bullion brand PAMP SA. They make it possible to accumulate gold by buying online through institutions, broking houses and payment platforms. You can regularly buy gold for a minimal amount and the accumulated gold is kept in secure storage in the custody of MMTC-PAMPL. It allows maximum storage of five years after which the investor must take delivery.

4.      Gold Funds

Derivatives offer the greatest deals of leverage; however, an average investor can gain exposure to gold via mutual funds that buy gold or using gold ETFs which are traded like shares on stock exchanges.

5.      Gold Mining Stocks

Gold miners’ ETF such as the Market Vectors Gold Miners (GDX) is a good option to diversify an equity portfolio. Gold mining stocks, owning the stocks of companies that mine for and sell gold, such as Barrick Gold (ABX) or Kinross Gold (KGC) do not give direct exposure to gold. Hence, owning shares of these companies mainly gives the investor exposure to the operating profit margins of that company.

Conclusion

According to the World Gold Council, “One difficulty with gold is that there are no conventional ways to measure or assess it, other than recognizing it as a long-term store of value. Yet we know how it behaves. It likes real interest rates to be falling, along with the currency it is being measured in. This implies that the best possible environment for gold is when inflation is rising, interest rates are falling and the dollar is weakening.” (5)

Owning gold may be a hedge against economic downturns, especially in volatile times. It’s possible that gold could become an essential part of your investment portfolio that helps balance out the risk and offers a stable portfolio. However, in our opinion, it is advised that the exposure should not exceed 10-15% even in these conditions.

Not interested in gold as a long-term investment? Check out our recent post on Costco Stock here.

Sources:

  1. https://economictimes.indiatimes.com/markets/stocks/news/20-return-anyone-gloom-boom-doom-author-tells-you-where-is-the-money/articleshow/70714037.cms
  2. https://www.marketoracle.co.uk/Article65310.html
  3. http://www.usfunds.com/investor-library/frank-talk/what-a-u-s-rate-cut-could-mean-for-gold-prices/#.XVrV1CMzbIU
  4. https://www.cnbc.com/2019/08/16/ways-to-protect-your-money-in-case-theres-a-recession.html
  5. https://www.interest.co.nz/personal-finance/101251/many-investors-buy-gold-instinctively-long-term-store-value-charlie-morris