Some new factors have driven up the price of gold. You might want to buy bullion and gold producers to diversify. Just keep its long-run disadvantages in mind.
Gold trades at a price that has risen significantly in 2020. Several new factors are supportive of the price of gold and gold producers.
One such factor is the uncertainty surrounding the transfer of power to a new US president and his administration.
A second new factor is historically-low interest rates and ‘quantitative easing’ (central banks buying bonds to cut rates). This reduces the ‘opportunity cost’ of holding gold. That is, holding gold costs you less in terms of foregone interest.
A third new factor is upwards price momentum. As the price of gold rises, speculators jump on the bandwagon. But momentum eventually ebbs.
A fourth factor is a lower US dollar. Since gold trades in US dollars, the price to foreign buyers goes down as their currencies can buy more dollars.
Monetary and fiscal policies are ‘loose’
A fifth new factor is large budget deficits worldwide. This is to keep economies on life support until effective and safe vaccines are developed, rolled out and economic growth recovers. Large deficits raise the risk of a debasement of paper currencies and significant inflation. Gold can hold its value.
A sixth factor is a loose fiscal policy to rebuild infrastructure, arrest climate change and launch government ‘pet projects’ that could stoke inflation.
A seventh factor is the growing middle class in China and India, which prize the yellow metal.
An eighth factor is higher demand by central banks. Some want gold reserves—not currencies.
A few factors that weigh on the price of gold
There are also some factors working against the price of gold. One is that it produces no income. Worse, you must pay for its safe keeping.
A second factor is the higher price of gold saps the demand for gold jewelry and other gold products.
Third, higher gold prices make it more profitable to produce. This can lead to more supply.
Fourth is fewer short sales. Short sellers borrow gold, sell it and hope to replace it at lower prices. They pocket or lose the difference between the price at which they sell and buy back. With the price of gold climbing, short sales have less appeal.
The price of gold is notoriously unpredictable. The industry itself didn’t foresee the last substantial setback in the price of gold.
We have 14 buy-rated gold producers in our latest gold stock survey. Favour our Key stocks Agnico-Eagle Mines (TSX—AEM; NYSE—AEM) and Barrick Gold (TSX—ABX; NYSE—GOLD). Alternatives to stocks include gold exchange-traded funds or gold bullion.
This is an edited version of an article that was originally published for subscribers in the November 13, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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