Struggling under U.S. sanctions, Venezuelan President Nicolás Maduro is selling off his country’s gold reserves as he clings to power. That might be the only good excuse for selling gold now.
The shiny metal is finally having its day in the sun. Gold prices have shot up 6.9% in June alone. The jump has been inspired by both the desire for a haven as the U.S. economy slows down and global tensions ratchet up, and the recently confirmed dovishness of global central banks. The price of gold passed $1,400 on Friday, the highest level since September 2013, and a breakout could potentially attract a new wave of investors and confirm that gold is finally a must-own asset again.
While gold doesn’t offer yield like bonds do, this matters less in a world where rates on many fixed-income assets are at historic lows. Investors also expect the Federal Reserve to cut its target rate later this year, which could cause the U.S. dollar to fall. A cheaper greenback could help gold gain even more traction because gold prices tend to move in the opposite direction of the dollar.
Gold could also benefit as countries diversify their reserves away from dollar-denominated assets, says David Kotok of Cumberland Advisors. Global central banks have been accumulating gold over the past decade, with China tripling its gold reserves since 2009 and Russia increasing its by four times, according to World Gold Council data. “What they’re doing is to substitute gold in an increasing amount for U.S. Treasury holdings,” explains Kotok, “If China broadens its gold holdings further to match other countries, such an appetite will cause an upward movement in the gold price.”
If the case for owning gold is clear, how to get that exposure is a more complicated decision. Investors can buy the bullion—either as bars or coins—from gold dealers directly. Many financial advisors, banks, and stockbrokers also offer such a service. Commissions can be high, however, and there may also be a cost for storage.
An easier way to play rising gold prices is to own shares of exchange-traded funds that are backed by the precious metal and track its price closely. There are many available that differ in cost, liquidity, and where the gold is stored, but provide nearly identical returns. The $33 billion SPDR Gold Shares ETF (GLD), the first and largest of the gold ETFs, charges $40 for every $10,000 invested a year, while the $12 billion iShares Gold Trust (IAU) charges $25. Some newer alternatives, including the GraniteShares Gold Trust (BAR) and Aberdeen Standard Physical Swiss Gold Shares (SGOL), charge even lower fees, but aren’t as liquid as the larger ones.
Still, given the bullish backdrop, buying gold miners instead of gold itself might be the most rewarding—if riskier—way to play the precious metal. When gold prices rise, so does gold-miner revenue, which some investors have described as an embedded “option” on the metal. That makes miners highly correlated with the commodity price, but with an extra boost when gold prices are rising.
That is exactly what has happened in June. The VanEck Vectors Gold Miners ETF (GDX), which holds shares in 46 major gold miners, including Newmont Goldcorp (NEM), Barrick Gold (GOLD), and Newcrest Mining (NCMGY), has climbed 16% in June on the back of gold’s rally.
Unfortunately, the same principle holds true when gold prices fall—as anyone who has owned the miners during the past seven years can tell you. But with all the pieces falling into place, that bet might finally be ready to pay out.
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