This year, investments in the gold metal have shown some of the most successful results in terms of profitability among other asset classes (stocks, bonds, real estate). Last week the price of gold futures reached a new historical high, approaching $2,650 per ounce (+6% for the month). And the dynamics of the year as a whole amounted to over 25% in dollar terms. It is also interesting that investors can get an even higher return in rubles – about 33% (the reason is the weakening of the ruble against the dollar).
Just a few years ago it was difficult to imagine such dynamics. Of course, these figures this year are quite pleasing for investors, but it is worth noting that such results are the exception to the rule rather than a systemic story. There are several factors, the first is geopolitics.
Most investors are interested in hedging assets, which has historically included gold. This is typical for both individuals trying to find the safest place for their investments, large funds, and even the world’s central banks. The latter has had a significant impact on gold demand in the 2022-2024 period, including this asset more intensively in its reserves. This was especially actively done by the central banks of developing countries: India, Türkiye, China, Russia and others. Central banks’ annual purchases of 1 thousand tons in the 2022-2023 period may not be a “one-time action” but a new reality. (World Gold Council data).
The second factor is the Fed’s monetary policy. Two weeks ago, the US Federal Reserve reduced the interest rate by 50 basis points for the first time in 4.5 years. – Up to 4.75-5%. Against the background of the latest inflation data (according to which inflation in the country continues to slow down), the consumer price index (CPI) in July was at the level of expectations (0.2% m/m), while the producer price index (PPI) was lower (0.1% m). /m, base — 0.0%). The Fed noted in a press release that it has made progress in reaching its 2% inflation target, signaling a shift to looser monetary policy. This will support yellow metal prices.
The third factor is the slow increase in gold production.
Supply in the market cannot keep up with the rapidly increasing demand for metal. Capital-intensive production and high cost inflation force gold miners to approach new projects with great caution.
These factors will continue to support gold prices. At the same time, it’s probably not worth counting on comparable growth over the next 12 months that we saw last year. In the current environment, supply and demand are close to balance.
The average annual return on investment in gold over the last 20 years is around 10%, making it a hedge against inflation, which is one of its primary functions. Therefore, the asset is an excellent tool for portfolio diversification. In my experience, investors allocate an average of 10% of their portfolio to this asset class. It is worth noting that the optimal weight of gold in a portfolio will depend on your goals, investment horizon and attitude to risk.
There are currently several ways to invest in gold in Russia. This is physical gold (bars, investment coins). Disadvantages here include liquidity and possible additional costs for storing and securing the product.
There is also an impersonal metal account (UMA). This is a bank account where funds are deposited in precious metals.
There are also gold futures. It replicates the dynamics of Chicago gold futures. Before starting to work with this option, the investor must necessarily understand the features of working with futures contracts.
Another method is gold exchange. The GLD/RUB currency pair is an instrument for buying and selling gold for rubles with payment on the precious metals market of the Moscow Exchange tomorrow. In my opinion, this option is one of the most suitable because it has high liquidity and minimal costs for the investor.
And finally, shares of gold miners. They do not have a direct link to the gold price but are suitable for investors who are risk tolerant and ready to invest in business. The Polyus-Gold company is one of the leaders in the field of gold mining in Russia and is the most interesting idea among traded gold mining stocks in terms of risk-return ratio.