Submitted by William Briat as part of our contributors program.
Time to Rethink Your Gold Investments?
By Moe Zulfiqar
Is it time to rethink your gold investments? This question is being asked by those who have held on to their investments as the prices of the precious metal have come down significantly. It wasn’t too long ago when gold bullion prices soared beyond $1,900 an ounce; this year, they are facing scrutiny. Gold bullion prices witnessed plunges in April and June, and now sit close to $1,300, down more than 31% from their peak.
This decline in gold bullion prices has caused concern, and I completely understand why. For example, gold miners’ share prices have collapsed, both senior miners and exploration companies.
With this in mind; I certainly think it’s time to rethink the gold investments that investors hold in their portfolio.
Before going into any details, let me make this very clear: I continue to be bullish on gold bullion prices ahead. I see the most basic principles of economics, supply and demand, are at play; gold bullion is seeing increased buying worldwide, while supply becomes anemic every day that the prices remain stressed.
The reason for rethinking gold investments is due to the basic portfolio management principle that things can change very quickly and investors have to change with them. Investors have to keep in mind that the deeper the losses get, the harder it is to break even. For example, if an investment has come down 50%, it will have to go up 100% just to break even.
Let’s face it: some gold producers have come down significantly and exchange-traded funds (ETFs), which provide leverage to gold bullion prices, have tumbled downward, too.
If investors hold gold producers in their portfolio, they need to study their actions and make sure they are in “survival mode.” Investors have to dig deep and research if the gold producers they own are trying to cut their costs or are spending lavishly. At the same time, they have to see if the producers have made any changes to their production habits. Are they depleting their cheaper deposits to extract reserves? Are they looking to close their expensive operations? And most importantly, is their cash position increasing or decreasing?
Gold producers that are not taking these actions may face more scrutiny as gold bullion prices remain stressed.
Similarly, if investors hold ETFs that provide leverage to gold bullion’s performance, they need to look deep, assess their risk, and ask if it aligns with their long-term goals. These types of funds ultimately magnify the losses; for example, if investors own an ETF that provides twice the leverage on gold bullion prices, then losses in their portfolio can go very deep if the gold prices go down by 10% from their current level.
“When the going gets tough, the tough get going” is easier said that done. The gold bullion market is facing severe pressures and long-term investors have to act accordingly.