November 14, 2023

Gold Is Hot. What’s the Best Way to Play It?

Gold is back with a vengeance.

Despite high interest rates, which some investors thought would damage its reputation as a safe haven, both institutional and individual investors are buying gold in massive quantities.

A recent JPMorgan report provided a shocking number...

Allocations to gold among non-bank investors have reached its highest level since mid-2012.

In other words, investors hold more gold at this point than they did at any time during the past eleven years.

This is big news.

And this trend is poised to continue…

Here at the Canadian Mining Report, we look at the most attractive opportunities in the commodities space. And right now, gold appears to be enjoying more attention than it did in many years.

Here’s what it means.

Markets Are Optimistic About Gold

Most financial media outlets are focused on high interest rates and how they can hinder gold’s performance.

But high interest rates are the result of high inflation. It is still above central banks’ targets, though inflation has been declining in major economies over the past several months.

In July, annualized inflation in the United States reached 3.2%. A year ago, it was above 8%.

In Canada, annual inflation slowed down to 3.3% in July, down significantly from 7.6% a year ago.

Clearly, there is progress.

But both the Federal Reserve and Bank of Canada want to drive these numbers even lower. At the current levels, inflation is still too high.

And this is the reason why investors have been turning to gold.

Yes, cash pays more in interest now than it did when rates were near zero, but inflation keeps eating at investors’ savings, driving real yields (which are nominal yields minus inflation) lower.

What happens next with inflation and interest rates is anyone’s guess.

But it’s this uncertainty that makes people go back to gold, which they see as a safe haven and an asset that can outperform inflation in the long term.

A survey of asset managers conducted by Bloomberg showed that most of the professionals polled said that they would either keep or increase their allocation to gold in the coming 12 months. (The survey was conducted in mid-August.)

Importantly, none of the asset managers who were asked about their gold allocations planned to decrease them.

Over two-thirds of them also said that they expect the price of gold to rise over the next 12 months.

As soon as the Federal Reserve stops raising interest rates, investor demand for gold could increase further. And the swaps market estimates that there will be no more rate increases and that the Federal Reserve could start lowering interest rates next year.

This is an excellent setup for gold.

And it explains why investors are bullish these days.

Lower interest rates and higher-than-average inflation could provide gold with two powerful catalysts. A lot of investors who preferred to stay on the sidelines while the Fed and other central banks were hiking postponed their investment in gold.

Now that there is less uncertainty about what could happen in 2024, they are ready to buy.

What’s the Best Way to Invest in Gold?

Individual investors have several options when it comes to getting exposure to gold.

Buying a physically-backed gold ETF is a convenient way to invest in the yellow metal. These ETFs closely track the price of gold and provide a similar upside as the commodity itself does.

Further out on the risk-return spectrum are gold mining companies.

Canadian gold mining juniors can potentially deliver higher returns (albeit at the cost of higher risk) than gold itself.

Among them, production-stage companies have the lowest risk because their share prices are supported by cash flow and assets with quantifiable value.

Canadian development- and exploration-stage mining companies are riskier… but they also offer the highest upside potential.

This is why investors should consider having multiple exposures to the price of gold.

A gold-backed ETF is a convenient starting point.

But it’s arguably not enough. To add more return potential, investors may want to consider a portfolio of high-quality Canadian mining juniors with exposure to gold and other precious metals.

If the gold bull market continues (and we expect that it will), these can potentially deliver much higher returns to the investors who are comfortable taking on more risk.

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