Gold’s Glitter at Christmas

Gold is inextricably linked to festive events. Whether it's the jewels at an Indian wedding, the golden watch at a farewell after many years of loyal service, the shiny teeth of the rapper who gets his first gold record or the peak on your Christmas tree. Gold is everywhere. Gold is timeless.

But 2020 has been a special year for the precious metal, which reached a record price above $2,000 a troy ounce in August before falling back. Mounting uncertainty drove gold’s epic rally, before the rising prospects of a Covid-19 vaccine took the wind out of it in the early autumn (see figure 1).

Figure 1: Goldprice development (USD / ounce)

Source: Bloomberg, VanEck. Past performance is no guarantee for future results.

The extraordinary trials of 2020 serve as a reminder that gold has always played an important part in investment portfolios. Historically, in times of crisis it has moved in the opposite direction to stocks and shares, cushioning a portfolio against losses (see figure 2). Indeed, since ancient times it has acted as a store of value: a hedge against times of turmoil. There is no guarantee, though, that it will continue to fulfill this role in the future.

Figure 2: A hedge against uncertainty – cushioning stock volatility

Source: VanEck. Past performance is no reliable indicator for the future.

Gold in 2021

Should governments’ unprecedented measures to boost economies worldwide – through monetary easing and fiscal spending – stoke inflation, then gold would once more prove its worth in a time of profound economic change. When inflation rises, so gold prices tend to follow suit. Right now, there are plenty of respected economic commentators who think we are about to head into a period of unexpectedly high inflation, a marked change from the low inflation we have become used to.

At VanEck, we believe that gold currently looks attractive. Demand for the yellow metal is rising from multiple sources: central banks (especially from emerging markets) are stocking up their gold reserves, consumers are buying more of it and there’s a burgeoning need for making high-tech electronics. By contrast, supply is limited and new deposits are being uncovered more slowly than existing mines are being depleted. Joe Foster, our gold strategist and portfolio manager, recently reiterated his view that gold could trend to $3,400 an ounce in the coming years (up from $1,815 as of 1/12/2020). This might be a conservative forecast considering the 180% rise in gold since the Global Financial Crisis.

Metals vs miners

So, how to invest in gold? Too often investors associate gold investing with buying physical gold. An alternative is to buy stocks in gold mining companies, also referred to as ‘gold stocks’.

This approach has three advantages over buying physical gold:

• While storing physical gold costs money, gold stocks (normally) pay dividends. Therefore, even with a stable gold price you will receive a return.
• Historically, gold stocks have moved up (and down) faster than upward (or downward) moves of the gold price. This is because gold miners’ operating costs are largely fixed, so a rising price amplifies their profits.
• Even if the gold price remains stable, there is scope for managers of gold mines to make operational improvements that can boost earnings and stock prices.

How to access gold?

As with all investments, diversification is advisable. A single gold mining stock might own just one mine, which could unexpectedly exhaust its deposits or run into some kind of operating difficulty. Far better to diversify across a large number of gold stocks.

The VanEck Gold Miners UCITS ETF does this for you, investing in more than 50 of the world’s largest gold mining firms. Alternatively, if you share my colleague Joe’s highly bullish view on the gold price, you could consider the VanEck Junior Gold Miners UCITS ETF. This ETF invests in the 80 gold stocks that are still in the exploration phase, so called ‘junior gold miners’, prioritizing the most liquid, These young firms benefit most from rising gold prices, as they only start to turn a profit once the gold price reaches a specific level. You should realise, though, that these ETFs are highly volatile and are concentrated in only a single sector.

Even though the promise of vaccines make Christmas the most cheerful time of 2020, gold has not lost its luster. Not only does its shine always brighten up this festive season, but it can serve as a useful hedge in an investment portfolio as economies strive to return to normal in the year ahead.