Gold appears to be settling into the low three thousands, biding its time until new developments with US tariffs, inflation or any number of geopolitical disputes send a signal to the broader market to buy or sell.
This article is a journalistic opinion piece which has been written based on independent research. It is intended to inform investors and should not be taken as a recommendation or financial advice.
When it comes to major institutions such as J.P. Morgan, Bank of America and DoubleLine Capital, the mood is decidedly rosy, with each of them predicting that the price of gold will approach US$4,000 over the near term, representing a 18.9 per cent return from the price on July 24.
Others, such as VanEck and the London Bullion Market Association, have been more adventurous with their forecasts, laying down cases for continued growth through 2030 to as high as US$7,000, catalyzed by inflation, economic instability and increasing diversification within central bank reserves.
Consequently, the market is handing investors a prospective runway to begin or increase their exposure to gold, meriting a thorough answer to the question of how to go about it. To this end, here are four strategies worth considering when it comes to investing in gold, organized from lowest to highest risk-and-return potential:
- Physical gold.
- Financially sound-producers.
- Proven developers.
- Junior miners with data-driven potential.
1. Physical gold
The first gold investing strategy we’ll examine calls for building exposure to gold itself by purchasing physical coins or bars, or picking up shares of an exchanged-traded funds that stores bullion on your behalf.
A risk-adjusted position – considering that gold underperformed stocks by almost 3 per cent per year from 1971-2024 – protects your portfolio with the metal’s long-term track record as a hedge against inflation and economic uncertainty, serving the dual role of preserving value and minimizing volatility when investors are either excessively pessimistic or irrationally exuberant.
Respected names in the investment space, including Sprott, Morningstar and Royal Bank of Canada, recommend an allocation of between 5-15 per cent to ensure it’s of sufficient size to play a meaningful role in harmony with the rest of your portfolio.
With gold hovering around it’s all-time-high of more than US$3,400, investors may want to dollar-cost average into their positions, whatever percentage they settle on, to lower their average long-term purchase price.
While investors in physical gold reinforce their portfolios’ all-weather resistance, this comes at the expense of lower relative returns compared to gold producers, developers and explorers, which have a chance of besting the returns of the metal alone through operational leverage.
2. Financially-sound gold producers
Our next gold investing strategy focuses squarely on producers, whose revenue and profitability makes them the best aligned to take advantage of strong gold prices and foster shareholder value.
Unlike mine developers and mineral explorers, both offering avenues towards differentiated, but perhaps more esoteric returns – as we’ll discuss later on – producers can point to the numbers on their balance sheets and income statements as irrefutable evidence of their progress and worthiness of a long-term spot in your portfolio.
You can start to narrow down your investable universe by limiting yourself to mining-friendly jurisdictions, such as Canada, Europe and the United States, where governments shy away from authoritarian tactics such as nationalizing assets.
Cull the numbers down even further by identifying producers with multi-year track records of rising revenue and profitability, whether that’s adjusted EBITDA if the company is investing heavily in capacity expansion, or net income if the company is focused on improving grades and margins.
To make sure you’re dealing only with elite investment candidates, take the third step of isolating management teams with previous production experience, granting them transferrable problem-solving skills, and careers spanning both up and down markets, increasing the likelihood of sound capital allocation.
While this framework for attractive gold producers will increase your probability of a satisfactory outcome, it remains a probability and not a guarantee, so make sure to diversify your risk with investments across geographies and market capitalizations, protecting yourself against commodity market volatility and the future’s inherent uncertainty.
3. Proven gold developers
One notch higher on the risk spectrum, we have gold developers, who have managed to establish mineral resources on their projects and are actively pursuing the permits, studies and funding required to build mines, reach production and garner investor favor by tracing a path to profitability.
Unlike producers, mineral developers are pre-revenue companies, making it more difficult to determine whether a stock is over or undervalued compared to existing operations, but it’s by no means impossible.
The first thing to get a handle on is resource size and economic viability, which developers will proudly advertise as part of a series of studies of increasing reliability, including the preliminary economic assessment, pre-feasibility study and feasibility study, used to demonstrate value to governments and investors.
Broadly speaking, green flags to look out for include a multi-million-ounce gold deposit large enough to attract producers keen to increase in-house reserves, and efficient enough in terms of its method of extraction to suggest that the mine is a worthwhile profitable endeavor.
Secondly, you’ll want to see evidence of a consistent development track record, traceable through news releases, substantiating management’s ability to keep its eye on the bottom line as it allocates resources towards construction, personnel, equipment and the umpteen other pillars of reliable mineral extraction.
Thirdly, and tying it all together, is the question of funding and how far the mine in question is from processing its first gold. Most developers will have to tap the public markets, diluting existing shareholders, hopefully in a controlled fashion geared towards sustainable long-term value creation. Others will opt for earn-in agreements with larger companies well-equipped to expedite production, often leading to a stock falling in proportion to the percentage of the mine the original company signed away.
Investors in this category should expect to see higher returns tied to, no surprise, development milestones, including new studies, permits and resource estimates, coupled with heightened volatility compared to producers given their pre-revenue operations, opening the door for wider dislocations between share price and intrinsic value.
4. Junior gold miners with data-driven potential
Our final avenue for investing in gold, junior miners, presents the highest risk-reward scenario we’ll cover in this article, one driven by the companies’ early-stage nature, difficulty raising capital, and lengthy cycle from exploration to a mine construction decision, not to mention being largely reliant on management to interpret available samples and drilling data and find its way to an economical resource.
In the most optimistic case, a junior gold miner will deliver positive news flow over a number of years, ideally marked by high-grades of continuous mineralization, supplying investors with enough reasons to push the stock higher, or at the very least fortify it against short-term macroeconomic swings by increasing its correlation to the price of gold. This mineralization would then lead to a resource estimate, which is expressed in ounces and can be valued based on the price of gold and estimated extraction costs, commonly causing stocks to skyrocket on the announcement.
In the more common case, initial signs of a project’s prospectivity will not pan out, leading management to shift focus to another asset in the portfolio. Alternatively, exploration may continue until outstaying its welcome, long after prudent capital allocation would allow. In both cases, investors are often saddled with steep losses and companies can face bankruptcy and a delisting, making due diligence especially important with junior miners.
If you decide that investing in early-stage gold miners is for you, you can de-risk your positions by sticking with management teams that have raised money and made discoveries before and companies that own projects in regions known to be mineral-rich, but your ultimate investment outcome with come down to asset quality. This is why junior mining investors must diligently study all existing data tied to an exploration project, including surveys, samples and drilling, to accurately assess portfolio suitability.
Parting proviso
While gold has stepped confidently into the role of hot commodity over the past few years, market history has taught us that the asset class limelight is temporary by nature, with some other high-return story set to command investor attention when the global economy settles down and safe-havens are replaced with risk-on sentiment.
When this transition will happen is open for debate and will only be known after the fact, so do please keep gold’s cyclical nature in mind, should the precious metal fit your financial plan and investment philosophy.
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