EDITOR: | July 3rd, 2018

Trade war fears and a 6 month low gold price means it may be a good time to invest in the gold sector

| July 03, 2018 | No Comments
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Gold is well known as an investment safe haven, which acts as a store of wealth over time. Gold often does well in bad times, but this is not a given. This past month the fear (volatility) index rose and investors withdrew record amounts of money out of equity funds, moving back into US Treasury Bills (cash). Added to this the oil price stealth bull run, has inflation fears rising to the surface again. Is it time to add some gold to your portfolio?

Below is a one year graph of the CBOE Volatility Index (‘the fear index”) showing the recent June upwards spike to be quite small compared to last February 2018 when investors were worried about inflation and rising US interest rates. This time the fear is about Trump’s tariffs and trade wars. The way things are going many fear it may get a lot worse before it gets better.

The late June 2018 spike in the CBOE Volatility Index (‘the fear index”)

VIX spike in June smaller than last February 2018

The gold spot price has recently dropped to a 6 month low, which may be an opportune time to buy given the increased level of risk right now with a global trade war potentially just in the early stages of intensifying. Looking at the charts below gold has mostly met downside resistance at US$1,200-1250/Oz. At the current gold spot price of US$1,253 now is a good time to take another look at the gold sector.

Gold price charts for 1, 5, and 28 years

Popular gold metal and gold miners funds

Funds such as the SPDR Gold Trust ETF (NYSEARCA:GLD) and the iShares Gold Trust ETF (NYSEARCA:IAU) give exposure to the gold metal price. These do well if the gold spot price rises and vice versia.

Funds such as iShares MSCI Global Gold Miners ETF (NYSEARCA:RING) and VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) give exposure to a basket of gold miners. These will do well if the gold miners in the indexes do well. They give most exposure to the larger market cap gold miners such as Newmont Mining, Barrick Gold , Newcrest Mining, Goldcorp, and Agnico Eagle Mines.

Buying gold miners directly

Experienced investors will tell you when assessing gold miners you should consider many factors such as resource size (inferred, indicated, reserves), gold grade (nice if above 0.75 g/t), strip ratio or access to the gold, by-products, licensing and permitting, location access and infrastructure, management, and country risk. For me size, grade and location are key, with some exploration upside, and at a fair or cheap valuation.

In conclusion, gold has several benefits in a portfolio and can serve as a hedge against other risks and hence be a type of wealth storage or insurance. Investors should remember that gold can still go down in times of fear, and that the junior miners often have many risks associated with them.

With overvalued US equity markets, jittery investors, politicians stirring up trade wars, and gold at a 6 month low, now would be a good time to make sure you have some gold insurance.


Matthew Bohlsen

Editor:

Matthew Bohlsen holds a Graduate Diploma in Applied Finance and Investment (similar to CFA), and a Graduate Diploma in Financial Planning. He has 30 years ... <Read more about Matthew Bohlsen>


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