There’s been a strong demand for gold as an investment lately, with the nominal price of gold hitting new highs this year. And it now looks like gold and silver prices might be much higher in the future compared to current levels.
The classic main investment categories are usually fixed income, listed equities, private equity, and real estate. However, beyond these, there is also a fifth category, sometimes a little forgotten and yet even more traditional, namely precious metals. Precious metals are gold, silver, and platinum group metals. Of these, the grandest and most beautiful is, of course, gold.
From an investor's perspective, the main difference between precious metals and base metals is that precious metals, in addition to their industrial and other end-uses, have always stood out as investment targets in their own right.
You can invest in gold or silver either directly or, as in the Evli Silver and Gold fund, through the shares in gold or silver mining companies.
The success of both types of investment will ultimately depend on the future price development of the metal. However, it is important to recognise that the volatility and risk of mining is greater in scale than that of metals.
The value of a precious metal mine is primarily determined by the price of the metal it extracts. When the market price of gold rises, the profit of the mining operation increases and the calculated value of the deposits that it owns rises. When the price of the metal falls, the change is the opposite. Quite often this change is much more pronounced than the change in the metal price.
Should everyone have gold in their portfolio?
So why and how should you go about investing in gold?
Personally, I have preferred the approach of setting aside a smaller portion of the portfolio for gold investments, with this portion consisting of both gold and gold mines. At the same time, you also shouldn’t forget silver and platinum group metals. As with all investing, it is always important to use judgement and remember to diversify. This also applies to gold, and gold mining in particular.
However, it is worth noting that gold often moves independently of stocks and bonds, which can provide a hedge against market volatility. An investment in precious metals, for example, consisting of both physical gold and the mines that extract it, therefore has the potential to provide diversification benefits to the portfolio that are different from many other asset classes.
Physical gold does not pay interest nor dividends and is therefore best comparable to banknotes, but with the key difference that gold's ability to maintain its purchasing power is much better. Historically, gold has retained its value over the long term, thus acting as a hedge against inflation’s erosion of purchasing power. Gold can therefore be seen as a kind of ‘super-note’ and gold mines are the printing presses for these 'super-notes'.
For example, until the early 1970s, the Finnish markka had a so-called base value, according to which, as part of the then 'Bretton Woods' currency system, one markka was worth 0.211 grams of gold. If you had €1000 of today’s euro currency in banknotes at that time, their nominal value today would still be the same €1000, while the gold equivalent of the then-prevailing 'base value' of €1000 would be around €88,000 today. more than defending its purchasing power 50 years ago.
In investment portfolios, the role of physical gold is to provide stability and a form of insurance against a possible fall in the value of money. Such a fall in the value of money is typically the result of sovereign debt problems, with subsequent attempts to help the government carry its debt burden by increasing the money supply.
Gold is therefore worth keeping an eye on now and I believe that its value as an investment will grow.
Petter Langenskiöld
