First the war in Ukraine, then the record inflation rates and now the collapse of several large financial institutions: perfect breeding ground for crash prophets. With one hand they paint the collapse of the global financial system on the wall, with the other they offer frightened investors the seemingly perfect solution: gold. As a guarantor of value retention, the precious metal should lead through the crisis. But gold investments should be viewed with caution, their track record is mixed.
The fact is: Since the turn of the year, things have been going extremely well for precious metal enthusiasts. The price of gold in US dollars and in euros is currently hovering near its all-time high. At around 1969 US dollars per troy ounce, the gold price on Wednesday was 7.7 percent above the rate at the end of 2022. Over a six-month period, the plus is even 18.5 percent. There are two main reasons for the brisk demand for gold: the continuing uncertainty and the weakening greenback. The latter makes gold more attractive again for investors outside the USA. Whether it is still worth getting into the gold rally depends above all on individual expectations of how the banking crisis will continue.
In any case, investors should not be blinded by golden promises of salvation: Gold is anything but a safe investment. Protection against inflation has not always worked in the past (roughly between 1980 and 2000), nor is gold particularly resilient to fluctuations. On the contrary, the gold price fluctuated between 300 and 1880 euros in the two decades before the current high. In addition, gold does not pay interest. This makes long-term investments in the precious metal particularly unattractive, especially in times of rising interest rates on savings. It seems that gold can only prove its strength in the extreme crisis scenario.
Of course that's not true either. As a building block, gold can reduce the overall risk in the portfolio and thus undoubtedly has its right to exist. Those looking to add the extra stability to their portfolio can do so in a number of ways. On the one hand, the well-known ETCs, coins or bars are suitable for private investors. Alternatively, they can invest directly in the shares of mine operators. However, the prices of securities depend not only on the price of gold itself, but also on the development of the company. A so-called gold price lever is also often evident: if the gold price rises, the gold mine shares increase disproportionately – and vice versa.
Barrick Gold is one of the largest gold mine operators in the world. While Canadians are benefiting from rising gold prices, they are also struggling with rising costs. Net income at the end of 2022 was manageable at $432 million. The year before, the company had earned more than $2 billion. In addition, gold production, at around four million ounces, was at its lowest level since the turn of the millennium. But that should change this year – Barrick wants to boost production. The price-earnings ratio (P/E) based on the expected profit for 2023 is 23. So the papers are no longer cheap.
The Australian competitor Newcrest Mining is currently in talks about a takeover by the US industry leader Newmont Corporation. The relatively small mine operator from Down Under reports high net profits of 1.2 billion and 872 million US dollars for the years 2021 and 2022. After the miserable performance of the previous year, the papers are now going uphill again. With a PER of 14 (2023e), the company is moderately valued.
Editor's note: This text was first published by CAPITAL.
