Gold Stocks – The Ultimate Hedge
In uncertain times, such as those we are seeing today, what is the best way to protect our wealth, and are gold stocks the ultimate hedge against these bad times?
For the conservative investor, gold stocks have traditionally been seen as a highly speculative investment. After all, as Warren Buffett has stated over and over, the yellow metal has few industrial uses, and in today’s world of the US dollar not backed by a gold standard, gold seems to be an anachronism at best.
So, what explains the parabolic rise of gold stocks in recent times? And why should I have gold bullion or gold stocks in my investment portfolio?
First, gold is a global currency, and always has been. Second, it is backed by real value, whereas paper money is backed by no value, other than a belief in the soundness of government policy and the net worth of the country issuing the paper currency. Third, as far as countries such as China, Russia and India are concerned, gold is not an anachronism. Fourth, what will happen if the Trump administration starts a currency war? What will be left standing – metals with real value such as gold and silver, or pieces of paper?
Gold stocks go mainstream
These factors may explain why hedge funds are now moving into gold. When hedge funds move into gold, we can be sure gold has become a good main-stream hedge against bad times.
Why do we believe gold shares are the ultimate hedge against bad times? Our first investment on the stock market was $60,000 in St Barbara about six years ago. At the time St Barbara was seen as a highly-speculative little-known gold miner. If only we had followed Warren Buffett’s advice of sitting tight and believing in ourselves.
In 2015, St Barbara was the second best performing stock on the ASX. Over 15 months, St Barbara rose a staggering 2,262% as new management significantly improved the companies poor performance.
The beauty of gold stocks is that when they move up, they move up sharply. The converse also happens. With an active investment strategy we can maximise potential profit opportunities when gold stocks rise, and minimise any potential losses when they fall, periodically adjusting the percentage of gold stocks in our portfolio to maximise their portfolio diversification value.
Buy gold sold in Australian dollars, not US dollars
The other important thing to remember about ASX gold stocks is that when Australia’s currency is being belted, and our economy appears to be tanking with the Aussie dollar falling, the income of Australian gold miners selling gold in Australian dollars (such as Evolution Mining, Northern Star Resources, Millenium Mines and St Barbara) goes through the roof.
As the Aussie dollar falls, the price of gold in Aussie dollars rises.
So why did St Barbara’s shares rise 2,262%?
We can put the dramatic rise in St Barbara’s shares down to four key factors:
- A rising US dollar gold price
- A falling Aussie dollar
- Lower production costs
- Increased production
When the price of gold in US dollars is rising and the Aussie dollar is falling, these factors combine to double the impact on the price of gold sold in Australian dollars.
For Australian investors, buying shares in gold production companies that sell gold in Australian dollars is therefore arguably the ultimate hedge against bad times.