Whether it is tensions in the Middle East, Africa or elsewhere, it is becoming increasingly apparent that political and economic uncertainty is another reality of our modern economic environment. For this reason, investors typically look to gold as a safe haven during times of political and economic uncertainty.
Why this? Well, history is full of collapsed empires, political coups and collapsing currencies. During such times, investors who owned gold were able to successfully protect their wealth and in some cases even use the commodity to escape all the turmoil. Consequently, whenever there are news events that suggest some type of global economic uncertainty, investors will often buy gold as a safe haven.
Generally, gold is seen as a diversifying investment. It’s clear that gold has historically served as an investment that can add a diversifying component to your portfolio, whether you’re worried about inflation, a declining U.S. dollar, or even protecting your wealth. If your focus is simply diversification , gold doesn’t it is correlated with stocks, bonds and real estate .
Gold as a dividend-paying asset
Gold stocks are usually more attractive to growth investors than to income investors. Gold stocks generally rise and fall with the price of gold, but there are well-managed mining companies that are profitable even when the price of gold is falling. Increases in the price of gold are often magnified in the prices of gold stocks. A relatively small increase in the price of gold can lead to significant gains in the best gold stocks, and holders of gold stocks typically achieve a much higher return on investment (ROI) than owners of physical gold.
Even those investors focused primarily on growth rather than steady income can benefit from choosing gold stocks that demonstrate strong historical dividend performance . Dividend-paying stocks tend to post higher gains when the sector is growing and do better—on average, nearly twice as well—than non-dividend-paying stocks when the overall sector is in a downturn.
The gold mining sector
The mining sector, which includes companies that mine gold, can experience high volatility. When evaluating the dividend performance of gold stocks, consider the company’s dividend performance over time. Factors such as the company’s dividend payment history and the sustainability of the dividend payout ratio are two key elements to examine in the company’s balance sheet and other financial statements.
A company’s ability to sustain healthy dividend payments is greatly enhanced if it has consistently low debt levels and strong cash flows, and the historical trend of the company’s performance shows consistently improving debt and cash flows. As any company goes through cycles of growth and expansion when it takes on more debt and has a lower cash balance, it’s imperative to look at its numbers over the long term rather than a shorter financial frame.
Different ways to own gold
One of the main differences between investing in gold a few hundred years ago and today is that there are many more investment options, such as:
- Gold Futures
- Gold coins
- Gold companies
- ETF-uri de aur
- Gold mutual funds
- Gold Bullion
- Gold jewel
A bad time to invest in gold?
To determine the investment merits of gold, let’s check its performance against the S&P 500 over the last 5 years (as of April 2021). Gold has outperformed the S&P 500 quite a bit over this period, with the S&P generating nearly 100% of its total returns compared to gold, which returned just 42.5% over the same period.
That said, the time period we’re looking at is incredibly important. Gold, for example, outperformed the S&P 500 over the 10-year period from November 2002 to October 2012, with a total price appreciation of 441.5%. The S&P 500, on the other hand, appreciated 58% over the same period.
The point is that gold is not always a good investment. The best time to invest in almost any asset is when there is negative sentiment and the asset is cheap, offering substantial upside potential when it returns in favor as indicated above.
The bottom line
There are both pros and cons to every investment. If you are opposed to owning physical gold, buying shares in a gold mining company may be a safer alternative. If you think gold might be a safe bet against inflation, investing in coins, bullion or jewelry are avenues you can take to gold-based prosperity. Finally, if your primary interest is to use leverage to take advantage of rising gold prices, the futures market may be your answer, but keep in mind that there is a fair amount of risk associated with any leveraged holdings.