Due to COVID 19 or coronavirus, financial markets have plummeted and unemployment has skyrocketed. These events have made everybody anxious with investors desperately searching for safe places to place funds.
You might have considered investing in fixed income (i.e bonds), but these can be subject to interest rate and inflation risk. It could be wise to look at investments that aren’t susceptible to inflation, like precious metals since the government is increasing spending. Below, you’ll learn about the top reasons to invest in Gold during the COVID 19 pandemic.
Inflation and Deflation Hedge
Gold is a tangible metal that has a finite supply, unlike dollars that can be endlessly printed by the Federal Reserve. Currently, the government has lowered interest rates, offered special business relief packages, and “free” stimulus checks to help those struggling due to the COVID 19 pandemic. However, these actions will greatly increase the inflow of dollars, which leads to higher inflation.
Increased inflation will raise the prices of everyday goods and services, as this will strain the already burdened middle class. Having gold exposure will protect your portfolio as gold prices tend to rise during periods of high inflation. Gold prices have also skyrocketed around times of uncertainty like the 2008 economic crash. Per this chart below, the price per ounce rose above $1,000 during 2008 and hit 2,000 in 2012. It’s continuing to increase during this crisis as well and is currently trading around $1,700 per ounce.
What happens to the demand for gold during deflation, which is the opposite of inflation? During deflation, prices decline and economies around the world are burdened with debt. It also makes people distrust and lose confidence in their local government. Deflation was experienced during the Great Depression and in some areas after the 2008 financial crisis. People chose to hoard cash, with gold bars and gold coins being the safest places to do this.
COVID 19 Impact on Mines
COVID 19 has been extremely unique as it has closed down schools, parks, beaches and other non-essential businesses, including mines. Since mines are closed, it has become much harder to create gold bars and coins. Many investors are accustomed to investing in these assets, which are becoming more scarce and expensive due to closed mines. Many gold companies are requiring investors to pay premiums in addition to the regular coin or bar price as well.
Luckily, you can obtain gold exposure by investing in Gold ETFs. The two main types of Gold ETFs are:
- Those that track the price change of the metal. These investment pools either store physical gold bullion and/or have sizable gold futures contracts.
- Investment pools that invest in gold-related companies. Some of the underlying companies can include those that mine gold directly or provide financing to gold miners. Gold financing firms often have contracts that let them directly buy gold from the mining company at a discounted rate.
There are many gold ETFs to select from like the SPDR Gold Trust, IShares Gold Trust, and Van Eck Merk Gold Trust. Axel Merk, the founder of the VanEck Merk Gold Trust (OUNZ) ETF, stated that “I think gold is going to go higher,” “Historically, in times of crisis people like to have gold.”
With uncertain times, inflation around the corner, and mining companies closing, he may be right.
Unlike paper assets such as stocks, gold is very versatile. For example, it can be used to create jewelry, metals, and statues. Besides this, it’s very valuable in medicine and dentistry as well. Dentists use gold to fill cavities, crowns and create other orthodontic appliances because it’s very malleable.
Gold also doesn’t react with other metals and won’t cause chemical reactions. It’s also very safe because it’s nonallergic, so patients won’t have to worry about any negative side effects. These traits make it a perfect resource for creating various shaped tools and fillings.
Gold has been used in dentistry since 700 B.C when pre-Roman civilizations used gold wire to repair their patients’ teeth. It was also used to fill cavities during ancient times, but its usage slightly declined during the 1970s when prices increased. Despite price increases, dentists and other medical professionals are continuously using gold for various procedures.
It’s a very valuable tool for the semiconductor industry as it carries electrical charges easily. Gold can be found in chips, computers, cell phones, and other electronics. Unlike silver, it’s not susceptible to corrosion or oxidations, which can damage entire systems.
Another little known use for gold is in aerospace, especially on satellites. Satellites float in space and it can be hard to repair these tools. So, it’s crucial to ensure that these along with other space devices are built with the highest quality materials. Gold also acts as a lubricant between mechanical parts. Organic lubricants would be broken down by the intense radiation of the Earth’s atmosphere, but Gold can withstand this.
Correlation to other investments
Diversification is key to having a stable financial portfolio as it prevents you from being overweight in one asset class. You might think that having a mix of stocks, bonds, and ETFs is sufficient. However, all of these assets can be negatively impacted by inflation, interest rate risk, credit risk, and other unseen perils.
Gold can be a great portfolio hedge as it performs well when stocks decline. This was seen as recently as 2019 when investors were fearful of heightened market volatility. Gold can be a great portfolio hedge, but it’s crucial to not invest your entire portfolio into this asset class. A good rule of thumb is to invest up to 10% of your portfolio into gold. This can include investing in a combination of physical gold and gold ETFs.
These are scary, uncertain times with rising unemployment and volatile markets. Despite this, there is an opportunity to thrive and investing in tangible resources like gold can add some stability to your portfolio. It’s prudent to consider investments that won’t be significantly impacted by high inflation, interest rate risk, nor credit risk. Investors think bonds are “safe” but they can be just as risky as equities if they have mediocre credit ratings.
What do you think? Is Gold a Safe Harbor For Investors During the Pandemic?
you can check out more concerning investing in gold, and other precious metals, at goldbroker.com one of the worlds leading providers of precious metals.