UNDER THE RADAR REPORT’S GOLD ADVICE
We continue to recommend higher quality gold shares for a balanced portfolio, providing much needed diversification benefits, which includes protection over time against market weakness.
The reason we have gold stocks in our portfolio is that invariably they have production growth. They’re always exploring and acquiring, as exemplified by stocks like Northern Star Resources (NST) which returned over 1200% for us in the past. Take out a 14 day free trial now to access our favourite ASX gold stocks to balance your portfolio.
THE ULTIMATE LONG-DURATION ASSET
As mentioned above, gold has no cash flow to support its price. Since the yield competition from cash and short-term paper has heated up so quickly, it can be argued that gold’s 15% fall in 2022 has been a relatively good performance.
The big factor in favour of gold is its fungibility or ability to be swapped for other assets, underpinning its relevance for thousands of years.
The yellow metal has certainly compared favourably to crypto currencies, with flagbearer Bitcoin falling over 60% in 2022.
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Gold miners have become accustomed to price volatility. Large fluctuations are to be expected. While the interest rates climb and US$ strengthens, the gold price has weakened.
The former is simply because gold is a non-yielding asset. The latter is more nuanced, because it’s based on gold being more expensive in other currencies paying in US$. If you’re an Indian needing to buy gold to manufacture jewellery, you have to buy in US$. A stronger US$ means you need to pay more in Indian Rupee, raising costs and reducing your demand.
On the other hand, the gold price in local currency terms, such as the A$, climbs relative to the US$, but this does not make up for the overall decline. Margins for gold producers are further impacted by the increasing costs of everything from cyanide, to labour, to equipment.
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A RECENT HISTORY OF THE YELLOW METAL
Prior to the Financial Crisis of 2007-11, gold had climbed from US$500 at the beginning of 2006 to US$1,000 as the Crisis started to take hold in 2008, then pulled back 25% at the end of that year, which formed the base for a rise to almost US$2000 by the end of 2011.
Gold fell with other asset prices as the Crisis evolved, but took a series of steps higher through the uncertainties in financial conditions after the immediate crisis had passed.
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