Gold had a turbulent year in 2018 – starting out around $1,300 an ounce, it was a year of two halves with prices passing $1,350 in the first six months but dropping below $1,200 later in the year.
By New Year’s Eve the precious metal had recovered most of its value but overall, 2018 was flat and as of the end of May 2019, gold was still trading below $1,300 an ounce with just a few short-lived forays into higher territory during the year so far.
So is gold still the reliable store of value that it has historically been perceived to be, particularly during times of broader economic turbulence?
One option that is often overlooked when considering gold as an investment opportunity is not investing in the metal itself, but instead putting your money into gold mining stocks – and there are good reasons to think that doing so could soon reap returns.
What drives demand for gold?
Like any commodity, the value of gold is driven – at least in part – by the balance of supply and demand.
But because of its role as an investment vehicle, a rising gold price does not always decrease demand, but can instead help to increase the number of people buying gold in order to tap into that upward cycle.
This positive feedback loop is good news for gold mining companies, and can often be seen in terms of their own investment into exploration, employment and expansion during a period of higher gold prices.
For some, this is overly ambitious, and can lead to considerable cost pressures during the next downward phase in the gold prices cycle.
What about recycled gold?
In a climate of increasing environmental awareness, more and more raw materials are being recycled – so what impact does this have on gold mining?
Each year, around three quarters of gold supply comes from mining activities. The remainder comes from recycled gold, with 90% of this from old jewellery and 10% recovered from electronics, according to the World Gold Council.
Only a very small percentage of gold that has ever been produced is no longer available for recycling, but that does not mean gold mining is decreasing in value over time.
Instead, when gold prices fall, there is less incentive to sell old gold for recycling – which can help to protect the value of gold mining stocks.
Meanwhile, because of the lead time involved with exploration, extraction and refining newly mined gold, this part of the sector helps to smooth out changes in value, unlike recycled gold which responds very quickly to spikes and dips in the price per ounce.
Safe ways to invest in gold mining
No stock market investment is completely without risk, but in terms of gold mining, the usual rules still apply – adopt a risk profile that suits you, don’t invest more than you can afford to lose, and diversify your investments to insulate against isolated losses.
Global gold funds are one way to do this, tapping into gold mining stocks wherever they are based in the world.
In recent years the main producers have been China, Australia and Russia, followed by the US and Canada, while South Africa’s output has declined compared with the previous decade.
Meanwhile Australia, South Africa and Russia have some of the world’s largest remaining gold reserves, making them potentially good prospects for long-term investment in gold mining.
There is another advantage to global gold funds in terms of currency exchange rates, as diversifying your investment between multiple major economies can also help to smooth out any dips, such as that seen in the dollar in recent months.
What lies ahead for gold mining?
No investment is guaranteed, but gold has historically been one of the ‘safer’ bets and there are some small signs that it is ready for a breakout in the latter half of 2019.
Whatever happens, gold mining is likely to retain its value in the face of a still-low gold recycling rate, especially with a well diversified investment fund.
This should help to insulate against individual stocks that cannot sustain their ambition, turbulence in gold spot prices, supply and demand, and changing currency rates in the biggest gold mining countries.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.