Gold is one of the oldest forms of investment, with roots tracing back to 550 BC under the order of King Croesus of Lydia. Since it was discovered, gold has maintained a steady historical significance, being perceived as a symbol of power, wealth, and stability. Even today, nearly 25% of Canadian adults are invested in gold.
Diversifying your portfolio with gold can seem like a daunting task, especially with numerous gold mining companies popping up on the market. In this article, we’ll explore how you can gain exposure to gold and the allure of gold mining companies.
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The Historical Significance of Gold Mining
According to the National Mining Association, the first gold mine is thought to be located in the Transylvanian Alps or the Mount Pangaion area in Thrace. By 1823, the first traces of gold were discovered in Canada near the Rivière Chaudière in Quebec, which is now the top mining jurisdiction in Canada. Today, there are over 125 active gold mines in Canada, making up 10% of global mines. One of the largest undeveloped gold deposits in Canada, which is gaining popularity, is the Troilus gold project located in Quebec, which should reach production status within the next few years.
Why is gold mining still viewed as important? Gold plays an important role in socio-economic development, providing mining jobs and generating revenue through both foreign and domestic investments.
Exploring the Investment Landscape
Gold’s investment landscape allows investors to participate in the potential rewards of both intrinsic value and the operational success of gold mining companies. The durability and scarcity of gold contribute to its intrinsic value. Beyond intrinsic value and aesthetic appeal, gold has been able to shield against periods of high inflation and market risk.
Gold is one of the primary hedges against inflation. As functional currencies lose value over time, gold retains its worth, making it an attractive option for investors concerned about inflationary periods. Whether you are an investor looking to expand your alternative investments or hedge against market volatility, gold has been a proven strategy for hundreds of years.
Furthermore, some of the largest gold companies open the door to significant returns on investment. The saying, “The greater the risk, the greater the return,” proves true for gold mining companies. There’s no guarantee that the company you invest in will hit big, contributing to the allure. However, if you are able to choose the right company, you have the ability to realize exponential returns.
The Value of Bullion
Bullion value refers to the value assigned to a precious metal in physical form. For example, the gold bullion value references the market price of physical gold per ounce. Gold is used by many countries to back currency because of its value. The United States has more than 8,000 metric tons of gold backing [AB1] the Federal Reserve (Madison Trust Company, 2023). Surprisingly, the Bank of Canada sold its gold reserves in 2016 and has yet to buy more despite rising inflation and the attractiveness to other countries.
Moreover, gold can actually improve your potential returns by stabilizing your investments and portfolio performance. Equities and bonds can experience dramatic shifts in values, especially during recessionary and high-inflation periods. The Toronto Stock Exchange posted an -8.5% return for investors in 2022. On the contrary, the price of gold stayed steady, increasing by 2% during 2022. The 2% increase in value helps offset the -8.5% equity return, resulting in minimized losses and portfolio values.
Different Ways to Gain Exposure to Gold
Purchasing physical gold is not the only way to gain exposure to gold. Gold mining companies provide an alternative route to enjoy added stability and heightened returns. First, there are gold mutual funds and ETFs that allow you to invest in a piece of the company. These investment avenues invest in physical and paper gold, sharing a portion of the return through dividends and market appreciation.
Another investment avenue is found in derivatives and futures. This investment forms a contract based on expected future prices. For example, let’s say you enter into an option contract to purchase two bars of gold for $120,000. If the price of gold increases by 10%, you have the ability to enforce your contract, gaining immediate appreciation on those two gold bars.
Another alternative method of gaining exposure to gold: gold mining companies. Investing in publicly traded gold mining companies allows for partial ownership of the company while benefiting from gold price movements and increasing earnings from the company’s outputs. Investing in a junior gold mining company on the other hand presents other potential gains, for example the discovery of an economically viable gold deposit could result in significant returns on investments.
Are you ready to find your next golden opportunity? When looking for a gold mining company in Canada, there are a few factors to look out for. First, the company should have researched data that guides mining decisions. Simply choosing a spot to start mining doesn’t increase your chance of striking it big.
Next, the gold mining company should have a commitment to sustainable development and a focus on fast-track development. Finally, there should be a strong outlook on the return on investment. You don’t want to invest in a company that isn’t going to make you money. Ensuring your investment meets these three factors can set you up for success when it comes to your next gold mining company investment.