There are many areas of concern for modern investors – increasing tensions in the Middle East and Eastern Europe, increased volatility and uncertainty in bond, stock and real estate markets and the prospects of inflation and recession in the coming years.
In such circumstance it is only appropriate that investors seek out strategic alternatives in order to preserve and grow wealth during difficult economic times. Precious metals have long been the solution to investors looking for tangible, long term means of protecting their wealth.
A well diversified portfolio may offer investors protection from the full effects of stock market downturns. Gold has a low correlation with traditional assets, adding diversity, protecting from potentially disastrous market crashes, provides a hedge against inflation and currency risk.
Gold investments serve three main purposes: assists with the management of risk through reducing portfolio volatility, protects purchasing power and minimizes losses during periods of economic turmoil.
Gold bullion or gold stocks?
The argument for investing in gold mining companies as opposed to gold bullion is a pretty straight forward one, and similar to why oil companies are very attractive as an investment when compared to the commodity itself. When the price of a commodity rises, the producing company’s profits increase at a greater rate than that of the commodity itself.
For example, if a mining company produces an ounce of gold for $1,000, with the market price being $1,200, then the company makes $200 per ounce profit. If the price of gold climbs by 25%, to $1,500, the profits of the mining company increases by 150% to $500 per ounce. This greater increase is reflected in the company’s share price.