Want to start investing in commodities such as gold? Find out how the commodity has performed historically, what you need to consider before investing, as well as the potential for dividends from gold stocks.
Growing your personal wealth with gold does not have to involve standing in a stream panning for precious metals. On the contrary, investing in gold can be as simple as trading shares.
Moreover, many retail investors prefer the perceived safety of gold during economic or political instability, and they may even diversify into gold to balance out their portfolio — hoping that the historical trend of the price of gold rising whenever the market takes a tumble — continues.
While past performance should never be used as an indicator of future success, people’s preference for investing in gold continues to this day. Could it be another way for you to grow your wealth? This blog will explore everything you need to know about gold investing in Australia, and share helpful information about the state of gold today and beyond.
What should you know about the gold industry?
Whether or not you believe gold is a lucrative investment strategy, there’s no denying its importance to the market both here in Australia and around the world. Its relative rarity globally means it continues to be an attractive prospect for everyone ranging from the average consumer right up to multinational mining corporations.
Estimates say that about 200,000 tonnes of gold have been mined around the world, with about two-thirds of that coming in the last 70 years or so. It is estimated that another 2,000-3,000 tonnes are mined globally each year.
Australia has been, and remains, a prime location for gold supplies. In 2020, Australia produced 327.8 tonnes of gold, the third highest amount in the world after China (368.3 tonnes) and the Russian Federation (331.1 tonnes). About 60% of our country’s gold reserves are in Western Australia.
How have gold stocks performed historically?
While the history of gold is intriguing, investors generally only care about one thing: how it is performing in the markets. First, it is important to define how people invest in gold. This is generally broken down into three criteria:
Physical assets
This includes everything from gold bullion bars to jewellery, coins and more. While some people like to physically own the gold they are investing in, it is not the most straightforward solution, nor the most lucrative in many circumstances.
Exchange traded funds (ETFs)
Considered by many to be more stable than exploration mining companies and even blue-chip miners, ETFs that focus on gold allow you to get exposure to the commodity without having to physically own and store it yourself.
Mining companies
Depending on your risk appetite, investing in gold mining companies may be preferable than investing in ETFs. While the share price of these companies tends to move in tandem with the price of gold, be aware that there may be an “amplification” factor to any market changes — meaning both bigger jumps when the price of gold is rising, but also bigger drops when it falls.
Historically, gold stocks have remained fairly steady over the decades before the price of gold began to increase year-on-year from the mid-2000s. In 2011, it hit an all-time high of almost US$2,000 per ounce before dipping in the following years. However, in July 2020, it eclipsed that high point and surged even further before fluctuating into the new year.
Ensure that you do your due diligence on the different types of gold companies before adding them to your portfolio.
What should you consider when investing in gold?
Here are some top considerations when you are thinking about investing in gold:
Do you want to hedge?
Gold has historically been a popular investment when either the US dollar is declining or inflation is on the rise. When investors’ money starts to lose value, they turn to commodities where the assets, such as gold, have traditionally retained their value.
Do you want to “park”’ your money in a safe haven?
If so, gold could be a potential option. When political and economic uncertainty are disrupting the markets, many investors see gold as a safe haven.
Do you want to diversify?
Diversification is a key strategy among most investors, and gold allows you to spread your risk across hard assets without having to worry about rising inflation or a dropping US dollar to protect your investment.
Whether you are keen to balance your investment risks with a commodity such as gold or you prefer the excitement of investing purely in shares, make sure that you do your research before deciding whether it is the right addition to your portfolio. Don’t forget to explore the ins and outs of commodity trading so you can invest with confidence.
Some popular gold stocks include:
How do you want to own gold?
While you can invest in gold on the share market through gold mining companies and gold ETFs, for example, you can also invest in gold bullion, jewellery, coins and more.
Can investing in gold offer dividends?
Investing in gold stocks may be attractive if you wish to earn dividends on your investment. For example, even if the price of gold is dropping, some gold mining companies can perform very well.
In fact, by investing in some of the best gold stocks, you could see a higher return on investment through dividends than you would by owning physical gold.
Tip: Blue chip stocks are a popular choice for dividend investors, as they typically pay dividends and are a stable, established option.
How did COVID-19 impact gold stocks?
As we saw during the Global Financial Crisis of 2007–08, the price of gold tends to thrive on political turmoil or economic unrest. So, it was hardly surprising that the COVID-19 pandemic was good for gold stocks.
At the start of 2020, an ounce of gold was valued at just over US$1,500; by August that same year, it was worth more than $2,000. While prices will continue to fluctuate according to external factors, it is clear that the impact on gold stocks was much more positive than negative during the height of COVID-19.
How is the gold market performing?
Gold started 2022 strong, hitting just over US$2,039 an ounce in early March. But the commodity did not maintain that same momentum into Q2. By the end of May, the price of gold had fallen close to 9%, influenced by the rising US dollar and the potential for interest rate hikes by the Federal Reserve over the coming months.
Tip: While gold may be one of the best-known commodities, you can invest in other commodity sectors too, including metals, energy and agriculture.
Because the price of gold is so closely linked to inflation and world events (of a political, economic and even environmental nature), it is difficult to know whether the commodity will be a good performer in the coming years. After all, who could have predicted the COVID-19 crisis?
However, that has not stopped the experts from chiming in about whether gold will be a winning investment beyond 2023 and for the rest of this decade. At the height of gold’s surge in mid-2020, some people were saying gold could easily hit US$10,000 per ounce by 2030.
Others are more bearish, believing that with the pandemic coming to an end and life returning to normal, there will be no need for investors to hedge their bets with gold investments. As with silver, the performance of the US dollar, which has been rising lately, will play a major role in the future performance of gold.
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FAQs
- Q: Is gold a good investment option for me?
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A: That will depend on your overall investment strategy and the type of assets you wish to invest in. For some, gold is a good investment option because it has continued to maintain its value over the long term despite its volatility.
- Q: When should I invest in gold?
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No matter the asset type, the best time to invest in something is when it is inexpensive and there is significant upside potential. That means when its price rises, you will have entered at a potentially lucrative time.
- Q: How much gold should I have in my portfolio?
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Much like any other asset, deciding how much gold to include in your investment portfolio is a personal choice. Be sure to consider your risk tolerance and your personal financial goals before investing.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.