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Gold: What’s Next for Investor’s Safe Haven of Choice?

Jon Brown Jon Brown, Stockhouse
0 Comments| February 11, 2020

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Click to enlarge
(Stock photo)

Gold is by far one of the most common and popular commodities for investors. Buyers and sellers continue to trade the precious metal through the bullion market along with silver and other derivatives.

After a few “sleeper years” coming of its peak from a decade ago, gold is back to becoming one of the hottest commodities right now and 2020 is projected by many analysts to be a year where its value tracks even higher.

Since mid 2019, gold has sat around $1,500 USD per ounce, (higher and lower) and some estimates say it could go as high as $1,700 in a year’s time. There are many factors that affect its price and many reasons investors continue to buy gold, which we will take a look at later.

One of the world’s most rare elements, gold makes up just 0.003 parts per millionof the earth’s crust. The 2019 GFMS Gold Surveyreported that global mine production was 3,332 tonnes in 2018, up 2% from 2017 and is the largest year-over-year growth in the last four years.

Gold is not typically seen as an investment on its own, but can serve as a solid enhancement to diversify a portfolio, along with other commodities. Historically, it has had high peaks and deep lows, which has made it a risky investment for those not closely watching market activity and ongoing events in the news.

For example, during the tenure of US President Donald Trump, gold prices were seen to head lower when he would Tweet positive commentson trade deals with China during their ongoing dispute. On the other side, as soon as he indicated on Twitter there was some uncertainty over a deal, gold prices grew 1%as investors moved to shore up the commodity. This all happened in just over one week’s time, proving it to be testy waters for many who are not quick to react, or don’t have the patience to wait out turbulence. Which is the right course of action? Is there a right course of action?

Keeping this in mind, there are three key reasons that, regardless of market fluctuations, people keep coming back to gold, because it is:

  • A direct investment
  • A hedge
  • A safe haven

Let’s take a deeper look into each of these practices.

Direct investment:

You could have bought gold for around $300 in 1994, but now it is worth just over $1,550. This is a gain of 400% over 25-plus years, but a solid and steady 7% increase per year.

Click to enlarge
(Price of gold in $US/ounce from 2010 - 2020)

Simply put, if the price increases, it will become more desirable for investors as a source of profit and more people will keep buying it to take advantage of this increase, driving up its value.

There is also a finite amount of gold in the Earth and it does have industrial purposes, as well as uses in medicine, electronics, the aerospace industry and of course, jewelry. Some believe this could lead to supply constraints, which would push its prices even higher.

Governments also store gold in mass quantities. The US Treasuryhas famously stored gold reserves at Fort Knox in Kentucky for decades. Selling the gold could disrupt markets. There is a direct connection between the Treasury, gold, bond yields (a return on investment) and inflation that has an overall effect on the economy. It is a positive relationship between gold and bonds that investors track regularly and you can find out more about this here.

A hedge:

When traders hedge their investments, they want to secure their finances from possible market volatility. This way, they can lessen the impact any turbulence will have on the value of their investment and if it does lose value, the investor will at least know how much they will be losing.

Gold as a hedge can often be used to offset the decline of a currency, such as the US dollar. When the dollar fell 40% from 2002 to 2007, the price of gold more than doubledfrom $347.20 to $833.75 an ounce.

In 2008, the gold market famously fell drastically, along with all markets in the financial crisis. Gold was being sold aggressively as investors worked to recoup losses elsewhere. During this time, the relationship between gold an stocks became very clear, as traders immediately sold stocks and bought gold, but as stock prices returned to normal, they brought their money back to capitalize on lower prices, but away from gold. However, gold also performed well in 2008 in many respects ….

A safe haven:

Not unlike a proverbial “war chest", gold has a become known as a stable reserve for finances during times of crisis.

"Safe haven investments” are assets which are expected to increase, or at least retain their value during periods of market volatility. Investors turn to these sources to decrease the odds of exposing themselves to losses should markets take a serious downturn.

Gold prices have traditionally increased in correlation to numerous events over the years, usually in response to financial crises across the globe, be it in the United States, Greece, or the Eurozone.

Looking at its history, gold was $869.75 per ounce in the 2008 financial crisis, then during the “debt ceiling crisis”it soared to its record high of $1,589.80. Looking ahead, it is projected to possibly hit a new high amid the recent outbreak of the Wuhan coronavirus.

Top gold mining jurisdictions:

One of the most common areas that is referenced in Stockhouse is Red Lake in northwestern Ontario. It is one of the most prolific gold mining districts in the world where roughly 28 million ounces has been produced from 28 mines. Canada has produced 17 tonnes more year-over-year in 2018. There have been a record number of discoveries in Red Lake and Canadian juniors have seen a great deal of success over the past year.

According to data compiled for US Global Investors’ “Frank Talk” article by Frank Holmes, Canada came in as the 5th top gold producing countryin 2018 - 2019.

The top 4:

  • 4 - United States – 253.2 tonnes - 78% of US gold produced is from Nevada and output has been on the rise since 2013 with a 10% jump in 2018
  • 3 - Russia – 281.5 tonnes - The source of 83% of European gold and output has increased over the decade with most of the demand coming from the government
  • 2 - Australia – 312.2 tonnes - Has seen an increase for more than the past half decade and the minerals industry produces over half of Australia’s total exports, generating 8% of its GDP
  • 1 - China – 399.7 tonnes - 12% of global mine production, but has been declining due to environment policies enforced by the government

Click to enlarge
(Chart via US Global Investors)

Frank Holmes poses the idea that all the “easy gold” has been discovered already and explorers have to dig deeper to find economically viable deposits.

“For example, South Africa was once the top gold-producing country by far, digging up over 1,000 tonnes in 1970 , but annual output has fallen steadily since. On the other hand, several nations have emerged in the last few years as growing gold producers.”

A 2019 report released by the Fraser Institutethat ranked mining jurisdictions on a more microscopic level pegged the state of Nevada as the most attractive jurisdiction in the world for mining investment, followed by Western Australia, Saskatchewan and Québec.

Forecasts indicate that it will be another robust year for precious metals prices in 2020 and this likely means that investor interest in companies that operate within these areas will be plentiful. The issue still lingers on where this gold will come from as the top five producers alone dig a major portion of the earth’s reserves, not to mention the juniors who operate in the many other areas around the globe, many of which remain relatively untapped. The near-term future of the economy will tell an interesting story but how much of it will hinge on gold?

New to investing in Metals & Mining? Check out Stockhouse tips on How to Invest in Metals & Mining Stocksand some of our Top Metals & Mining Stocks.

For more of the latest info on Metals & Mining stocks, check out the Metals & Mining Trending News hub on Stockhouse.

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