Investing in gold mining companies is a good way to take advantage of the rising gold price and leverage your investment. Production is the key factor that determines how profitable the gold company will be. Investing in reserves allows you to avoid time and risk associated with exploration and inflation risks. In addition, investing in gold mining companies will also help you take advantage of a rising dollar value for gold.
Buying reserves eliminates inflation risks
Inflation is a very real risk, and while gold is widely considered an inflation hedge, its history of inflation protection has been a mixed bag. Although gold has historically provided a good level of protection against inflation, some investors are not convinced of its safety and have overlooked the opportunity cost, volatility, and logistical complexities of owning the metal. Gold is also not the only asset class to be considered as an inflation hedge.
One way to combat the inflation risk is to invest in gold mining reserves. You can allocate 20% of your portfolio to gold, and the price will rise by around 10% each year. However, if you invest in gold alone, 80% of your portfolio will continue to lose purchasing power as inflation continues to rise. Therefore, for an inflation hedge to be effective, you need an investment that appreciates at a higher rate than inflation.
Inflation is one of the biggest risks to global economies. It’s caused by the rising geopolitical tensions and instability in the macroeconomic environment. Gold is considered a safe haven asset in such uncertain times, and its ability to protect investors from the risk of inflation will continue to rise. Furthermore, because gold is a tangible asset, it does not carry counterparty risk. Inflation is a major risk to global economies, but gold has the potential to protect you against near-term volatility, and even a global recession in 2023.
While gold is a good inflation hedge, it is not a foolproof one. As Arnott has noted, gold has a mixed record as an inflation hedge. During the 1980s, when inflation was at its highest, investors lost 10% of their wealth. However, gold did well during the 1970s and 1980s, when inflation was at 8.8% a year.
Investing in gold mining stocks offers leveraged positive returns during a rising dollar price in gold
Investing in gold mining companies can provide leveraged positive returns during a rising dollar gold price, though the risks are greater than investing in physical gold. Gold mining shares are speculative, and you will have to pay close attention to the business’s success before investing. Regardless of the risks, these investments have the potential to provide high returns for long-term investors. However, if you are looking for security in a rising dollar price, investing in gold miners may not be right for you.
One of the biggest gold mining companies, Barrick Gold Corp., is headquartered in Toronto and operates in 13 countries. Another company, Franco-Nevada Corp., does not own its own gold mines but buys royalties from other gold miners. The stock prices of gold mining companies tend to track gold prices. Each gold company’s earnings and expenses impact the share price, and its share price will fluctuate with gold prices. Single-stock investments in gold mining companies carry the same risks as any other stocks. The downside to single-stock investments is that they are volatile and don’t provide the safety of diversified funds.
Another risk is that corporate dynamics can take precedence over the price of gold. Although gold is a safe haven asset, the price of gold mining stocks can fluctuate wildly. Some have been steadily rising in recent years, while others have been declining steadily. Gold mining stocks, like Franco-Nevada, have suffered a more difficult decline from their 2011 peak, down almost 46% since the low of late 2015.