My Quick Take On The Gold Market - Diversify Within the Sector

Despite the latest market sell-off (which came earlier than I expected), the price of gold has skyrocketed. The world has finally realized it’s the only real safe haven asset that can’t be destroyed by frivolous government spending. The US dollar is no longer the flight to safety asset it once was.

Gold is flirting with $1800 an ounce, which is fantastic (for gold bugs), but the producers’ share prices have barely moved. Why is this?  You may recall a past blog of mine, written in February of this year, titled “Why Gold Producers Will Disappoint Unsuspecting Investors”

The main reason behind gold producers’ lackluster performances(thusfar) is due to the rising cost of production. Look no further than the price of oil, which has averaged nearly $95 per barrel all year. With that stated, thanks to this recent market meltdown, prices of many commodities (aside from precious metals) have dropped with the market. This is fantastic news for producers of gold…absolutely fantastic – especially if the price of oil can remain below $90 per barrel.

Cost of production is dropping rapidly of late and the price of the product being produced (gold) is rising to levels never seen before. This is the most ideal environment for gold producers to be in. If it lasts, producers’ market caps will explode (so be patient).

Not All Gold Investments Are Created Equal

Whether you believe we are headed for severe inflation or another recession, which will cause a deflationary environment (in my opinion), gold is the place to be. With that stated, certain gold assets will outperform others as they are not all created equal and perform much differently in certain environments.

For example, if the price of other commodities do not recover to recent pre-market meltdown levels, producers are going to dominate and provide shareholders with market leading returns. If we get back on track towards an inflationary environment, gold ETFs and physical gold will provide market leading returns.

The point of this quick blog is to emphasize the necessity of diversifying yourself within the gold sector as certain assets will perform differently depending on the economic environment.  

In my view it is wise to own all forms of gold assets. Gold assets range from junior exploration stocks to ETFs, to producers and the physical stuff.
 

All the best,

Aaron

* During the 1930s, during a deflationary environment, gold shares were star performers as the cost of mining gold sank.

This article represents solely the opinions of Aaron Hoddinott and not of PinnacleDigest.com nor Maximus Strategic Consulting Inc. Aaron Hoddinott is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof.  Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information is of an impersonal nature and should not be construed as individualized advice or investment recommendations.