Market Experts Share 4 Strategies to Profit from Rising Gold Prices

Since the beginning of the year, gold has seen a significant increase of 12.8% in US dollar terms, outperforming various asset classes such as equities by 2.8%, commodities by 4.3%, and long-term US Treasuries by 20.4%. A recent analysis from a financial research firm outlined four strategies for investors looking to benefit from rising gold prices.

Gold Prices Surge

Earlier in 2024, gold prices reached a historic high, exceeding $2,400 an ounce last month. A primary driver of this surge is the robust demand for gold from global central banks and households in Asia.

Following a recent visit to China, UBS strategists noted a prevailing optimism toward gold in the country, despite concerns regarding its rapid price increases and the shifting macroeconomic landscape. Investors in China, much like their international counterparts, are keen to understand the factors influencing gold purchases.

In the short term, Chinese investors tend to regard any decrease in gold prices as an opportunity to buy. While many hold a positive outlook for gold in the medium to long term, a period of consolidation is anticipated. This pause could subsequently rekindle physical demand, which has slowed recently, and recalibrate speculative interest.

Other emerging markets are also demonstrating strong interest in gold. A significant portion of global physical gold purchases is attributed to these economies, with around 30% coming from Greater China, 25% from Greater India, 20% from the broader Middle East, and about 10% from Russia and the Commonwealth of Independent States. This demand is often influenced by cultural factors and a distrust of local governance and financial systems, making gold an attractive option for savings in these regions. Consequently, gold prices often rise when emerging markets thrive and fall when entrepreneurs in these areas face challenges.

Gaining Exposure to Rising Gold Prices

In contrast to their Asian peers, investors in Europe and North America have not yet significantly engaged in the gold bull market. However, analysts suggest that if they choose to enter, identifying the marginal seller of gold may become increasingly complex, especially if growth in emerging markets persists.

For those looking to capitalize on this potential gold market scenario, the following four strategies have been suggested:

1. Hold the Metal Directly: This straightforward approach is simple, liquid, and typically carries few unexpected risks.

2. Invest in Gold Royalty Companies: These companies generally respond more moderately to fluctuations in gold prices and often trade at premium valuations.

3. Purchase Precious Metal Miners: After a decade of underperformance, mining stocks are now seen as attractively priced and underrepresented in portfolios. However, there are several factors to consider. Despite significant investments over the last ten years, many miners have not discovered substantial gold deposits. Additionally, gold mining is energy-intensive, meaning rising energy costs could negatively impact earnings. Moreover, gold mining often occurs in regions where property rights are uncertain, raising the risk of nationalization as prices rise.

4. Invest in Brokers and Money Managers Focused on Precious Metals: These firms benefit from increased trading volumes rather than price appreciation, although trading volumes typically rise with prices in a standard bull market. Currently, developed markets (excluding Japan) have experienced increases in gold prices but not yet in trading volumes. If this changes, firms specializing in precious metals may prosper.

In summary, there are several avenues for investors looking to take advantage of the current gold market dynamics, each with its own set of opportunities and risks.