After a hot start to the year, gold’s performance has somewhat subdued in recent months despite the usual supporting factors staying intact, namely high inflation and a bear stock market.
As a result, gold also can be considered a risky investment, as history has shown that the price of gold does not always go up, particularly when markets are soaring. Investors typically turn to gold when there is fear in the market and they expect prices of stocks to go down. And so, in a sense, gold can also be volatile.
So, over the longer term, stocks seem to outperform gold by about 3-to-1, but over shorter time horizons, gold may win out. Indeed, if we go way back to the 1920s through today, stock returns blow gold away. Firstly, gold is priced in US dollars, so when the dollar is strong – as it has been most of 2022 – gold appears relatively weak. This is also why the greenback is often considered an alternative safe haven to gold.Secondly, higher interest rates have made leveraged positions more expensive to hold and have magnified losses as prices have fallen. Gold rallied sharply in 2020 when central banks began quantitative easing programs and again in 2022 when Russia invaded Ukraine.
“So, there’s an argument there that, yes, it can be held as an inflation hedge—just not against the dollar. For all intents and purposes, gold trades more like a risk asset a lot of the time,” Gould stressed. People seek safety in the precious metal when they are concerned about losing real value from otherwise safe assets like cash and US government bonds, Cingari explains. These assets tend to decline in value when inflation expectations rise faster than nominal yields.Another factor to consider is that gold is facing competition from digital assets led by Bitcoin, which has changed the market dynamics to some extent.
On the other hand, demand for gold bars and coins grew 2% to 1,217 tons last year, and stayed strong through the first half of 2023. Demand growth reached 6% and 5% for the first two quarters of the year, respectively. In 2020, gold-backed funds like GLD accounted for two-thirds of global net inflows for investment demand in the precious metal. During that year, gold ETF inflows reached $47.5 billion, almost double the previous record inflow set in 2016. However, investment in gold ETFs subdued over the last two calendar years, highlighting the weakness of the gold market.
The biggest and by far the most popular is the VanEck Gold Miners ETF , which offers investors exposure to some of the largest gold mining companies in the world, such as Newmont and Barrick. Investors with a higher risk tolerance can also consider VanEck Junior Gold Miners ETF , which invests worldwide in small and mid-cap gold mining equities.However, despite registering a notably higher volatility than gold-backed ETFs like GLD, the gold mining ETFs don’t always have the best performance .
Although the capex spending began to recover in 2022, the level still fell far short of the peak 10 years prior, despite current global mine production being ~20% greater than a decade ago, the Sprott partners said. Ultimately, the performance of gold stocks is inextricably connected to the price behavior of the metal, in both the present and the future. In Sprott’s view, a bullish outlook for gold would far outweigh any other rationale for owning them.As the Sprott article states, the response of gold mining equities to the bull market in bullion has been disappointing.