Volatility on Wall Street has had most investors laser-focused on the stock portions of their investment portfolios over the past couple of years. However, other financial markets have started to get some more attention, particularly as even bigger swings in the bond market have had major implications for the health of the banking system.
One area that has quietly held its own in a turbulent period has been the commodities market. Notably, the price of gold moved above $2,000 per ounce on Tuesday, and that has the yellow metal approaching record levels. Gold's breakout move has implications not just for precious metals investors but also for those who prefer stocks and bonds, and it shows how different market participants perceive various events in different ways.
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How gold got where it is
The past several years have seen plenty of ups and downs in the gold market. The yellow metal set an all-time high of $2,075 per ounce in August 2020 as uncertainty related to the COVID-19 pandemic reached its peak. Since then, gold has traded down to as low as $1,600 per ounce in 2022 before beginning its latest rebound.
The dynamics of the gold market include several factors that don't always affect stock investors as much. Because a substantial amount of gold market activity involves speculation, interest rates for borrowing money have a significant impact. Low rates in 2020 helped bolster gold's prospects, but the quick rise in rates from central banks like the Federal Reserve in 2022 contributed to weakness in the precious metal.
Gold's most recent push above the $2,000 mark came as investors continue to wrestle with macroeconomic conditions. Data on job openings and labor turnover on Tuesday showed that available new job positions had fallen below the 10 million mark for the first time in nearly two years, which suggested to many market participants that the Fed's efforts to rein in wage inflation might be having a real impact. That in turn buoyed hopes that the Fed could pause in its monetary tightening in May, which could make it easier for gold traders to maintain their positions.
How to invest in gold
For those who believe gold could rise to record levels and beyond, there are many different ways to profit from favorable gold moves. Directly investing in gold is an option, with some preferring to buy physical bullion from local coin dealers and other sources. SPDR Gold Shares (NYSEMKT: GLD) is one of several exchange-traded funds that aim to track the price of gold bullion, often through purchases of substantial amounts of the precious metal.
Gold mining companies often see an even more pronounced move higher when gold prices rise, because the impact on their profits typically has a multiplier effect. The VanEck Gold Miners ETF (NYSEMKT: GDX) rose more than 3% on Tuesday, even as the percentage move in the metal itself was less than 2%. Similarly, with gold prices up about 11% so far in 2023, returns for the gold mining ETF are approaching 20%.
Lastly, those who don't want direct exposure to mining operations might prefer companies that provide financing to miners through gold streaming agreements. Wheaton Precious Metals (NYSE: WPM) has exposure to both gold and silver, and its stock is up almost 25% year to date. Royal Gold (NASDAQ: RGLD) concentrates more on gold streaming and has enjoyed a 16% rise in its stock price in 2023.
A place in your portfolio
Some see gold's rise as a contrary indicator for stocks. However, the same interest rate trends that help gold can make stock markets move higher as well. Investors shouldn't necessarily assume that rising gold means that the stock markets will fall.
Gold investments, whether through miners or through the metal itself, offer some diversification in comparison to the broader stock market. The benefit of investing in miners over bullion is that companies that produce gold often share their profits in the form of dividends, which can add some income to your portfolio. A small allocation to precious metals would give you exposure if gold's recent move turns out to be the beginning of something much bigger.
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