Since the start of the year, gold in US dollars has risen 12.8%, outperforming long-term US government bonds by 2.8%, 4.3% and long-term US government bonds by 20.4%. In a recent note, a financial research firm outlined four ways investors can gain exposure to rising gold prices.
Gold prices are rising
Earlier in 2024, gold prices rose to new record levels, with the yellow metal surpassing $2,400 an ounce last month.
A key factor behind this rally is strong demand for gold from global central banks and Asian households.
Following its recent visit to China, UBS strategists noted prevailing optimism about gold in the world’s second-largest economy, despite concerns about rapid price appreciation and the breakdown of macro correlations.
Market participants in China, like their global counterparts, are curious about the driving forces behind gold buying activity.
In the short term, Chinese investors generally view any decline in gold prices as buying opportunities. While there is optimism about the gold price in the medium to long term, many expect a period of consolidation in the short term.
This pause could revive physical demand, which has waned recently, and recalibrate speculative interest.
Like China, other emerging markets (EMs) are also showing strong interest in precious metals.
Nearly all physical gold purchases come from emerging economies, with approximately 30% of global purchases in Greater China, 25% in Greater India, 20% in the broader Middle East and approximately 10% in Russia and the Commonwealth of Independent States .
This demand is likely due to cultural biases and a lack of trust in local governments, the rule of law or domestic financial institutions. As a result, gold becomes a natural savings destination in these economies.
This trend explains why gold prices tend to rise when emerging countries are doing well and fall when entrepreneurs in these regions are struggling.
How to gain exposure to rising gold prices
Unlike their Asian counterparts, European and American investors have not yet significantly participated in the gold bull market.
However, if they decide to join in, identifying the marginal seller of gold could become a challenge, especially if growth continues to boom in emerging markets, analysts at Gavekal Research pointed out in a recent note.
For investors looking to take advantage of this potential scenario, the financial services provider has suggested four ways to gain exposure to rising gold prices.
1)’Hold the metal upright: “This is simple, clean, fluid and likely to contain few negative surprises,” Gavekal analysts noted.
2)’Buy gold royalty companies:’ According to Gavekal, these companies tend to offer lower beta to gold price changes and often trade at high valuations.
3)’Buy precious metal miners:’ After a decade of underperformance, these stocks are attractively valued and under-owned. However, there are several issues to consider, as highlighted by Gavekal’s analysts.
Despite investing billions over the past decade, miners have not found significant amounts of gold. Furthermore, gold mining is an energy-intensive activity, and rising energy prices could impact profits.
“Also, a lot of gold mining takes place in areas of the world where property rights can be ‘flexible’ and as the price of gold rises, the temptation for governments in places like Mali or the Democratic Republic of Congo to nationalize mines may increase. strong,” they continued.
4)’Buying agents and money managers specialized in precious metals:’ These companies benefit from rising volumes rather than prices, although in a typical bull market volumes tend to rise with prices.
“So far in developed markets (excluding Japan) we have seen rising gold prices, but not yet rising volumes. If this is the next step in the gold bull market, this part of the market could thrive,” the Gavekal team said.
