A Reason To Mine Gold

The market has been volatile with wild swings related to trade talk news, interest rate expectations, business or consumer data, global political uncertainties and lots more. Gold exposure has historically displayed weak correlation with movements in the stock market and hence this is an asset class that I am very interested to invest for diversification and risk management.

Ray Dalio was quoted by Bloomberg in the middle of 2019 explaining reasons why gold should be part of an investment portfolio. I fully agree.

The point that struck a cord was that gold would be a risk reducing, return enhancing asset class in my investment portfolio. Prior to reading (watching) this, I thought of gold as a temporary flight to safety and an asset I would not want to own as it does not pay an interest but only covers or provides for inflation as a store of wealth. Indeed as I describe below, gold does not return as much as equities over a long term but I was amazed when I dived further into the past financial crisis, that gold significantly outperforms equities in a downturn.

I made a screen of gold mining stocks and published the article Mining For Gold and shortlisted Newmont (NEM) and Newcrest (NCMGF) as potential investment targets with exposure to gold. I am grateful to readers who have suggested Alamos Gold Inc (AGI) to research on and that is where I am spending my time, after covering Newcrest (NCMGF) in this article.

If there is a crucial element in my portfolio that is going to impact my investment returns and retirement goals, then I would have to do a deep dive and hope to understand this missing element as soon as possible.

Gold has a history of having a weak correlation to stock market movements.

Gold Shares SPDR ETF historical correlation to S&P 500

Source: Bloomberg

I have a screen capture of Gold Shares ETF (GLD) and its relationship with the S&P 500 ETF (SPY) between 2013 and October 10, 2019. The resulting dot plot and red line drawn shows a weak linear correlation. 

Source: Bloomberg

Specifically over the 2008 and 2009 financial crisis, the Gold ETF rose steadily while S&P 500 suffered declines. 

Source: Bloomberg

The picture above shows the period between January 1, 2008 and December 31, 2009. While the S&P 500 ETF (SPY) declined by 20%, the Gold Miners ETF (GDX) declined 6% while Gold Shares ETF (GLD) increased 27% in price, representing a 14% annual return.

The benefit of investing in gold now is that if markets are turning volatile and uncertain, and interest rates are about to be lowered further, gold might be a flight to safety for investors. This was also the case between 2001 and 2002.

Source: Bloomberg

As a standalone asset class, I can understand why some investors would prefer just sticking to equities. I picked a near 20 year year comparison between a gold and silver index against the S&P 500 and the gold and silver index vastly under performed.

Source: Bloomberg

However, I firmly believe that gold is an asset class for risk management especially if more political and economic uncertainty is ahead of us. In the weeks ahead, I will be researching more into gold and silver investments as well as precious metal mining stocks and ETFs. This is the most important investment theme I have at the moment and I am laser focused on getting work done.

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