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Why Investing in Gold Remains an Attractive Way to Diversify Your Portfolio

Why Investing in Gold Remains an Attractive Way to Diversify Your Portfolio
Gold is often seen as a ‘safe haven’, a commodity that is little affected by market volatility and global turbulences.
Jun 15, 2016 By Simon Herrmann Tags: NCM, NST, Commodity, RSG, Gold

Is it the right time to invest in gold? The price of spot gold has increased ~21% since the beginning of the year making it one of the most attractive commodities of 2016. Gold has been in a downtrend for over four years and the precious metal had lost almost 50% of its value when the price bottomed in December 2015 (from its 2011 peak).

Gold is often seen as a ‘safe haven’, a commodity that is little affected by market volatility and global turbulence. On the other hand, critics see little value to invest in a security which does not pay dividends, which means investors are fully reliant on capital growth.

However as gold prices have already appreciated more than US$200 year-to-date, is it still the right time to buy gold and what is the outlook for the remainder of the year?

U.S. Dollar and Commodity Prices Generally Trend in Opposite Directions

In May gold was challenged after equities posted strong gains with the U.S. benchmark index S&P 500 gaining for a third month in a row to climb near its all-time high. In addition, the USD recovered against most currencies after showing weakness earlier in the year. In May traders priced in a relatively high chance of a rate increase by the US Federal Reserve (FED) (which seems to have now diminished due to weak jobs data), which pushed the value of the US currency higher.

The U.S. Dollar is probably the single most important influence for gold at the moment. The USD and commodity prices generally trend in opposite directions. The main reason is that commodities are generally nominated in U.S. Dollars, and when the currency appreciates, the price of the commodity is automatically challenged du to exchange rate. However, there are also indirect factors that come into play when looking at the relationship between currencies and commodities. When the USD rises and the US economy grows steadily, the currency replaces gold as the ‘save haven’ security, therefore eliminating the need to invest in gold (which doesn’t pay any interest).

Even though the FED has reassured numerous times that interest rates are likely to rise over the upcoming years, the move is expected to be slow and gradual. The USD has appreciated significantly since the FED ceased the quantitative easing program in October 2014 as it appears that a higher interest rates environment is already factored in to some degree.

Upcoming Challenges: Brexit, US Elections, China, Greece, Global Growth

Financial markets were shaken earlier this year as concerns about China and emerging markets intensified and several commodities declined substantially. Since hitting a low in February, oil prices have doubled from their lows and China’s trade data was somewhat stable as of late. However, markets remain sensitive and sentiment could worsen in the wake of a number of important events later this year.

The UK referendum on June 23 at which the people of the UK will vote to either leave or remain in the European Union (EU) is already affecting equity, bond and currency markets. You can read additional commentary on the impacts of the ‘Brexit’ scenario in Wise-owl’s research note on Nabtrade.com. Later this year, the US elections will likely make headlines as the market seems undecided which candidate – Donald Trump or Hillary Clinton – would be better for financial markets. On top of the that it is fair to say that a number of economies including China, Greece, Russia, Japan or Brazil will likely continue to face a number of challenges in the medium-term, while global growth is expected to remain subdued for the foreseeable future.

Investors Seek Safety in Gold

Following several months of low volatility, these challenges will likely unfold later this year, which makes a strong investment case for gold. The inability of central banks – such as the ECB or BOJ - to boost inflation and economic activity further diminishes confidence.

While gold has underperformed high risk assets in the past several years, the recent move to the upside is a sign that investors and traders alike are increasingly interested in the precious metal.

Australia is home to some of the largest and most efficiently run gold projects in the world and numerous gold mining companies operate profitably in the current environment. Find below a list of ASX listed companies with direct exposure to gold and their year-to-date price performance as well as the total return for the S&P/ASX All Ordinaries Gold Index.

 

Code

Name

Return YTD

ASX:RSG

Resolute Mining Ltd

+352%

ASX:DCN

Dacian Gold

+217%

ASX:SLR

Silver Lake Resources

+182%

ASX:BDR

Beadell Resources

+143%

ASX:SBM

St Barbara Ltd

+118%

ASX:NST

Northern Star Resources

+74%

ASX:NCM

Newcrest Mining

+70%

ASX:EVN

Evolution Mining

+66%

ASX:DRM

Doray Minerals

+62%

ASX:RRL

Regis Resources

+48%

ASX:XGD

S&P/ASX All Ordinaries Gold Index

+75%

 

The S&P/ASX All Ordinaries Gold Index includes companies from the Gold sub-industry of the All Ordinaries Index and serves as an ideal market indicator for the Gold industry. The sub-index has gained 75% year-to-date.

Investing in Gold?

However, while many of these companies have already appreciated significantly in value, investors need to assess the risk-reward ratio prior to making an investment decision. Not every company that operates in the gold space will automatically do well.

At Wise-owl we have reacted to the upsurge in gold prices very early and initiated coverage on a number of companies with direct exposure to the gold market: Resolute Mining (ASX:RSG), Gold Road Resources (ASX:GOR), Teranga Gold (ASX:TGZ) or MACA Limited (ASX:MLD).

Investors should look for high quality companies with the following attributes

  • a strong balance sheet that may enable countercyclical acquisitions

  • producers with low All-in-Sustaining costs and a long mine life

  • explorers with an attractive asset nearing important milestones

Investors can invest in gold via ETFs, gold mutual funds, gold futures or by investing in companies that operate in the gold space. Finding the right opportunities requires due diligence, research and a general understanding of the market. For those that either don’t know how to analyse stocks, or frankly don’t have the time to do it, should consider engaging with a finance professional such as Wise-owl.

Comment below, sign up for a free trial or call 130 306 308 to talk to the analysts at Wise-owl for more information.

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Simon Herrmann Author: Simon Herrmann Jun 15, 2016

Simon is a financial analyst at independent research firm Wise-owl who wants to change the world by disrupting the cliché approach to investment decision making with convergent thinking. Wise-owl’s goal is plain and simple: Find the best opportunities for our members by following a proven methodology and to create long-term value through high-quality advice, innovation, technology and education. We combine industry experience and the agile mentality of a start-up. Wise-owl is the future of stock market investing.

ASX & IPO Review for Q1 2017

The first three months of 2017 were characterised by low volatility and overall bullish sentiment. After a 4.2% gain during the fourth quarter of 2016, favourable market conditions on the ASX were sustained during the first quarter of 2017.

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