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Will the Uncertain Economy Boost Mining Stocks?
The history of gold dates back to 3000 B.C. when the ancient Egyptians started using the material to form jewelry, but it was not until 560 B.C. that it was used as a currency. Since then the purpose for gold has diminished, yet the majority of investors still hold some form of it in their portfolio. They have the option of holding the actual commodity, buying stock in gold mining companies or investing through exchange-traded funds. The importance of gold goes back to the fact that is has preserved wealth throughout thousands of generations. When investors face a declining U.S. dollar and rising inflation, the idea of the resource holding onto its value becomes even more important. Resulting from recent trade tensions, gold prices rally, pushing it towards a new six-year high.
Safer Commodity. When the economy is in uncertain times, investors tend to lean toward the safer alternative. As the U.S. dollar depreciates, people will be more inclined to hedge against risk with gold, as it has historically held its value. Investing can occur in all parts of the market, not only in the physical material. All parties involved will benefit from an increase in demand. Although an ambiguous economy can severely hinder growth in the market, mining stocks can see an increase when investors flock to gold.
Expanded Opportunity. Majority of the time, gold only sees an increase in demand when the market is under performing. During this time though they see a huge boost in transactions and stock prices. This provides an opportunity for micro-cap mining companies to grow in ways that they otherwise would not have had the ability to do so.
Inverse Relationship. When investors are worried about the future of the economy, they tend to turn to gold, which drives down the value of the U.S. dollar. An already weakening dollar makes gold cheaper for investors who hold other currencies which also increases gold demand. The dollar further weakens because to obtain gold, they must sell their dollar’s, lowering the demand and value, which in turn, worsens the economy.
Prices Climb too High. The price of gold typically reflects the expectations about the future. During times of uncertainty, the price will climb as investors move to it as a safer investment. This could cause the price to rise so high that it would be out of reach for consumers. Traders believe this would result in lower sales as customers recycle their gold in the upcoming season.
An Industry that Thrives in Uncertain Times. For gold demand and prices to increase, usually the value of the dollar must be declining. It is thought of as one of the safest options as it historically holds its value. The undetermined economy provides an opportunity for mining stocks to grow when the global market is contracting. Investors run to gold to preserve their wealth, which sends the value of the dollar down even more. If the value of gold continues to climb, prices could get too high for consumers causing next year’s sales to decline.
https://www.ig.com/au/news-and-trade-ideas/trade-war-escalates--as-panic-returns-to-global-markets-190825,Kyle Rodda, August 25, 2019
https://www.investopedia.com/articles/basics/08/invest-in-gold.asp, Nick Lioudis, May 18, 2019