It’s no secret that gold’s been rallying for the past few months. After its recent pullback, though, investors may be wondering if it’s reached its high.
Since the start of the pandemic, it was clear the economic toll would be massive. This resulted in governments moving swiftly to provide stimulus and prop up economies that were falling off a cliff.
While this was crucial in stopping the economic devastation, it isn’t without consequences.
Many investors, yours truly included, called for higher gold prices. Bank of America even went so far as to say that it expected gold prices to reach $3,000.
Since then, interest rates have stayed near zero, and prices for the yellow metal have skyrocketed.
When gold reached a new all-time high last month, it briefly continued on its rally before plateauing. Now after a few weeks, investors may be wondering there is more value left in gold.
The answer is a resounding yes. In addition to all the stimulus, real interest rates will likely stay near zero or negative for quite some time.
This can especially be expected after Jerome Powell’s comments on Thursday that essentially confirmed interest rates would stay lower for longer.
Furthermore, many countries will continue to need more rounds of stimulus as the duration of the pandemic continues to drag on.
The current economic environment is one of the best climates for gold in recent memory. So naturally, now would be a great time to make an investment.
There are a few ways to gain exposure to the precious metal. First off, you could buy an ETF that’s backed by bullion. A great example for Canadian investors would be the iShares Gold Bullion ETF (CAD-Hedged).
This fund is strictly tied to the price of gold and will precisely track the yellow metal’s price movements. Plus, because it’s hedged to the Canadian dollar, investors don’t have to worry about any foreign exchange risk.
Having exposure directly to bullion can be an ideal investment for those who don’t want to worry about individual business risk. However, if you’re trying to take advantage of skyrocketing prices, you may want to consider a more leveraged approach, such as a mining stock.
Gold stocks are ideal because of their considerable leverage to gold. If a company can produce gold for $1,200 an ounce and it trades for $1,500, the miner can make a $300 profit. However, if the price of gold rises just 20% to $1,800, that miner’s profit would increase to $600, giving it a 100% profit increase and effectively five times the leverage.
This is the advantage of buying gold stocks, especially during periods when prices are on the rise. The downside of investing in individual companies is taking on the additional execution risk.
Luckily for investors, there’s another ETF to consider, the iShares S&P/TSX Global Gold Index ETF.
The ETF gives investors exposure to a basket of the top mining stocks on the TSX, the best of both worlds. It offers higher leverage than the bullion ETF, but with less risk than owning an individual gold stock.
Since the bottom in March, the bullion ETF is up roughly 26%. Over the same period, the gold index ETF is up 65%. That’s approximately 2.5 times leverage, which could make a massive difference, especially if prices continue this rapid climb.
Although gold may have taken a pause, the economic environment hasn’t changed. The precious metal has done this before, trending sideways before breaking out with no notice. So I would use this pullback as the perfect opportunity to get some exposure.
Speaking of buying stocks on pullbacks...
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