o3 BLOG | Investing
Gold Demand Trends and Ways to Invest Now
Gold is a unique and multifaceted commodity that has multiple sources of demand. Due to it being both a consumer good (jewellery, technology components) and an investment asset, it retains its value throughout time and increases in value during periods of financial turmoil. Gold plays a crucial role in a well-balanced investor portfolio, complementing stocks, bonds, and other alternative assets. Gold acts as a versatile hedge, outperforming many major asset classes in both rising and falling markets. Further, gold is a highly liquid asset that carries no credit risk, is consistently in demand, is scarce, and can be preserved for future generations.
Gold stock opportunities
The values of gold stocks can sometimes reflect the price of physical gold (the precious metal). However, there have been instances when the stock markets rise, and gold pulls back. Inversely, gold prices often rise when stock prices fall, making gold an effective hedge in a turbulent stock market. Additionally, many gold mining companies have the potential to pay substantial dividends, which incentivizes investors to choose gold stocks over physical gold.
Gold investment products
Gold investment products are considered more accessible compared to other commodities, as there is a wide range of products from which investors can choose. While the values of certain commodities such as agricultural or non-renewable energy can fluctuate due to economic turmoil, gold investment products tend to be less volatile.
Physical Gold or Gold Bullion
Gold bullion has been a popular investment product for centuries, and usually comes in the form of gold bars/ingots, wafers, or coins. Once only available from precious metal dealers or banks, you can now purchase gold online. If you live in Canada, physical gold and other precious metals (with the exception of palladium) are not subject to GST/HST and must have a minimum purity of 99.5%. Other physical gold products such as jewellery are also considered investments but often come with a higher price tag. However, jewellery also holds sentimental value for many and is less likely to trade compared to bullion. The drawback of physical gold is that you need a secure place to store it otherwise, you run the risk of theft.
Gold mining companies
Gold mining stocks are another investment product that some consider to be riskier than investing in physical gold. Although speculation often drives these investments, many investors have proven rewards outweigh the risk and have seen substantial returns.
While owning gold bullion requires storage space and insurance, and gold mining companies can be speculative investments not suited for those who are risk-averse, gold EFT is another way to invest in gold. EFTs or Exchange-traded funds offer a flexible option that you can purchase online. Like physical gold, gold EFTs are high liquidity and can be traded in the stock exchange. You can easily participate in the gold market without investing in smaller denominations, which is less-costly compared to buying gold bullion.
Gold derivatives are any other investment products that derive their price based on the value of gold. Gold futures are financial contracts obligating the buyer to purchase gold or sell gold at a predetermined future date and price. Having future settlement dates means that you can hedge your business according to the future selling price and buying price of your physical inventory or if you believe that prices may move against your favour. The main advantage of gold options over futures is the smaller cash outlay and greater flexibility in selecting the price to hedge. When buying options, one is only required to pay the option premium, representing a small percentage of the notional to be hedged. For options, one has the advantage of selecting the price to hedge the physical gold position against, while for futures, one can only accept the price quoted by the market at any point in time.
Trading gold options and futures involves a learning curve and can take a seasoned investor to be successful. Derivative products can also include leveraged trading accounts where you can trade on the value of gold via an online trading platform. If you don’t own physical gold, gold derivatives can be a good short-term trading option over long-term investing. Costs can stay low over short periods of time but can add up over the long term.
Regardless of your investment goals, there are many gold investment products to choose from. Remember to do your due diligence and take into consideration the amount of risk associated with each investment.
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