While there are many ways to think about the Gold bull run, it is important to look at the numbers behind the gold price.
Gold’s price is now at an all time high, which represents one of the most aggressive bull runs for gold in decades. There are three broad reasons why we see gold increasing in value:
- Structural Demand — Investors are looking to protect their portfolios from inflation and currency devaluation;
- Geopolitical Pressure — Global instability is pushing investors toward safer investments;
- Monetary Uncertainty — Central Banks have printed money to stimulate economic activity and have created a climate where investors will seek alternatives to traditional assets, such as bonds.
Gold’s Price Movement by the Numbers
There are some very clear data points that explain the upward trend in gold’s price:
- Spot gold price is now above $5,000/oz;
- Gold has increased by approximately 70–85 percent in the last 12 months, which is one of the strongest annual increases ever recorded for gold;
- Central Banks continue to purchase gold on a net basis, adding hundreds of tons of gold to their reserve holdings each year;
- The real cost of borrowing is still historically low, which supports non-yielding assets like gold;
- After a multi-year decline, investment in gold-based ETFs has started to grow again at higher price levels;
Each of these items demonstrates that the current movement in gold is supported by actual capital flowing into the asset class.
How Can I Benefit From the Current Increase In Gold Prices?
Investors can take advantage of gold exposure in several ways:
Physical Gold
- Ownership of gold bullion or coins provides 100% exposure to gold without counter-party risk.
- However, storage and insurance costs need to be factored into any decision to invest in physical gold.
Gold ETFs
- Gold-backed exchange traded funds allow for the ability to buy gold quickly and easily while providing a means of selling your gold quickly.
- Gold ETFs are suitable for either a tactical position or as part of a longer-term allocation strategy.
- Gold ETF performance is generally a close proxy to spot gold prices.
Futures and Options
- Using futures contracts allows for buying or selling gold directly, potentially using leverage to magnify profit potential.
- Options provide investors with a mechanism to achieve asymmetrical upside potential, while limiting the potential loss of the premium paid for the option contract.
- Futures and options are best suited for experienced investors due to the inherent volatility of gold prices, as well as the requirement to post margin.
Gold Equities
- As gold prices rise, gold miners will experience improved margins.
- Exploration companies represent the potential for high-beta upside to the gold price based on exploration successes and advancements in development projects.
- It is possible for equity performance to exceed bullion returns in a sustained bull market, however, there is greater risk involved.
Junior Exploration Leverage in a Gold Bull Market
Historically, junior exploration companies have provided investors with outsized returns in a strong gold price environment.
When the gold price rises, capital flows downward from bullion to producers and then to explorers in areas with demonstrated resource potential.
This leverage to gold prices comes with a corresponding increase in risk. However, junior explorers may offer investors an opportunity for asymmetric returns when exploration success coincides with favorable gold prices.
Focus Company — Colibri Resource
- Ticker: CBI (TSXV) | CRUCF (OTC)
Colibri Resource is advancing exploration efforts at its EP Gold Project in Sonora, Mexico, which is located in a region that hosts large-scale gold deposits.
EP Gold Project Update
Colibri Resource is currently engaged in its initial-phase drilling program at the San Perfecto target and other priority areas of the EP Gold Project. The focus of this effort is to test the limited historical drilling of under-explored structural areas and to define mineralized trends and identify subsequent drill targets.
This effort follows upon previous drilling programs at the EP Gold Project, and was undertaken in order to methodically assess the project’s potential during a period of high gold prices.
Project Location
The EP Gold Project is situated in the Caborca Gold Belt, a historic gold-producing area in Sonora that includes properties operated by major gold producers and developers such as Fresnillo, Agnico Eagle, Osisko Development, Minera Alamos, and numerous other operators.
Being located in a proven gold-producing area reduces geological uncertainty and enhances the project’s strategic relevance should exploration confirm that the property contains economically viable deposits of gold.
Risk and Reward Profile
- Companies in the early stages of exploration are highly leveraged to gold prices and discovery success.
- The risks associated with early-stage exploration include: the quality of drill results, the availability of funding to continue the exploration program, and the timing of the next phase of exploration.
- Successful juniors in a strong gold price environment often attract significant investor attention and may experience a re-rating of their valuations.
Approach to Strategy and Positioning
An organized approach to taking advantage of the current gold price environment may include:
- A stable base of physical gold or gold ETFs for security;
- A portion of exposure to gold producers for potential margin-driven upside;
- A portion of exposure to gold explorers, such as Colibri Resource, for high-beta exposure to exploration-related catalysts.
Careful consideration of position size and diversification is required to mitigate the volatility of junior equities.
Summary
Gold’s recent price increase represents a fundamental shift in investor sentiment and expectations rather than a product of short term speculation.
With prices re-establishing themselves at a higher level, investors have a number of different avenues to capitalize on the increase — from conservative bullion exposure to aggressive, high-risk exposure to exploration opportunities.
Companies advancing projects in established gold producing districts during the course of this cycle may offer a vehicle for high-leveraged upside, but investors must continue to practice disciplined risk management as the gold bull market progresses.
Marc has been involved in the Stock Market Media Industry for the last +5 years. After obtaining a college degree in engineering in France, he moved to Canada, where he created Money,eh?, a personal finance website.
