With inflation concerns on the rise since the approval of President Biden’s latest stimulus package, could this spell a flight back to gold and other commodities, such as Bitcoin and silver?
With the money supply massively increasing and the oil price rising, it’s pointing to an inflationary environment. While financial markets don’t like inflation, safe-haven assets such as gold tend to thrive.
Precious metals such as gold and silver have been the world’s best inflation hedges for hundreds of years. But today they have competition in cryptocurrency and various economic cogs working against them.
US financial markets are in a state of flux, spurred by US stimulus, meme stock frenzy and an unprecedented rise in derivatives trading. This makes accurate prediction difficult and many analysts believe the dizzying rally of 2020 is unlikely to continue through 2021. Therefore, there’s good reason to believe demand for precious metals is set to increase.
Investors looking to differentiate their portfolio are increasingly looking at gold and considering whether they should invest.
Fundamentals of gold stock
When the value of the dollar falls, traditionally this has led the gold price to rise. That’s not happening quite yet, as the dollar appears to remain steady. Helped in part with US job growth beating expectations last month and surging past analyst estimates.
Fed Chair Jerome Powell insists inflation is not yet concerning the central bank. But he’s not addressing investor worries regarding rising bond yields.
With the price of oil rising and no reason for retailers to slash prices of consumer goods, it’s natural that inflation is creeping in. And as the central bank continues to pump money into the economy, it’s giving way to fear of a rapid run on inflation that no one is ready for.
In August 2020 the gold price hit $2000 an ounce after months of speculation, it currently sits at $1775. Uncertainty in the markets is undoubtedly the best time to buy gold and with so much of that going around, it would seem a fair bet that gold will rise.
But so far that’s not what’s happening. Instead, copper, platinum, and palladium are moving higher with momentum but gold and silver seem to be stuck in a rut. Nevertheless, there are still many gold bulls that believe inflation will drive investors back to gold. Whether we see the gold price hit $2000 again this year remains to be seen.
What is the bull case for gold stocks?
Gold has always been seen as a good investment asset to have as part of a balanced portfolio. It boasts some of the highest liquidity in the commodity markets and more often than not increases in value over time, although this growth may take a significant amount of time.
The price of gold since the pandemic hit has gone a long way to further reinforce its utility as a hedge to the S&P 500, in 2020 when the stock markets crashed, gold hit new highs not seen since 2012, with many analysts predicting further growth in the coming months and years.
During financial uncertainty, investment in gold is seen as a safe haven for investors and can be a good way to diversify portfolios and reduce exposure to risk. Although as with any investment there are no guarantees and capital could be lost.
What is the bear case for gold stocks?
The price of gold can fluctuate significantly over a short period of time and can take a long time to incline. Big declines can be difficult for investors to deal with and many lose confidence, investing in gold is certainly a long game and may not be suited to those looking for quick gains.
Another factor to consider is the competition from cryptocurrencies, the likes of Bitcoin are becoming increasingly popular with investors with many shunning gold for these modern, digital commodities.
If interest in cryptocurrencies continues to grow then confidence and sentiment for precious metals such as gold and silver will fall, which could lead to low prices that could take years to recover.
As we already mentioned, gold is a long-term investment but cryptocurrencies can offer quicker gains and also help with portfolio diversification. As more is understood about them and as they become more widely accepted as an investment option, crypto could be seen as the new investment safe haven, an accolade once reserved for gold.
Should I invest in gold stocks?
As with all investments, investing in gold does not come without its risks. And while it has always increased in the past, this is not a guarantee that it will do so in the future. Whether buying physical gold or investing in gold-related securities it is crucial that you understand what you are entering into.
For those looking for short-term gains, gold is possibly not the investment for you, if however you are looking for a long-term investment and want a way to diversify your portfolio then it may be worth considering investing in gold.