I have never been a gold bug, but they are out there celebrating as gold crashes through the $2000 mark. Of course, that’s in US dollars, and with the Aussie dollar rising from 57 US cents in late March to around 72 US cents now, the rally is not quite as impressive. 

Gold Price in US Dollars – 8/19 to 8/20 

Source: ABC Bullion 

Gold Price in Australian Dollars – 8/19 to 8/20 

Source: ABC Bullion 

But even in Aussie dollars, gold has hit an all-time high, topping $2800 per ounce. 

The obvious questions are why is gold rallying, and if you believe these factors are still in play, how can you take part? 

First to the rally. Gold is going up because currencies, most particularly the US dollar, are perceived to be losing value. Globally, Central Banks are printing money like there is no tomorrow, as Governments run massive deficits to help stimulate economies in the face of the COVID-19 pandemic. The biggest borrower in the world, the US Government, reported a deficit of US$2.7 trillion for the first nine months of fiscal year 2020. 

Interest rates are 0% or negative, so there is no “cost” to holding gold (an asset that pays no income). 

In an environment where the supply of “paper money” is surging, gold is your classic “hard” or defensive asset. The bull market in gold that started in late 2015 remains in place. And because gold is surging, other precious metals such as silver are also going for a run. 

The early arrival of a vaccine could put a stop to the rally as investors re-assess the need for ongoing support by Governments and other riskier assets (such as shares) get a boost. But the gold bulls argue say that fiscal support is here for years and until interest rates start to climb the fundamentals for gold (including legitimate commercial demand for jewelry and industrial uses) are strong. 

So, if you want to play the gold rally there are three ways you can do it. 

1. Buy physical gold 

Firstly, you can buy physical gold. You can do this with the Perth Mint or through dealers such as ABC Bullion. 

With the Perth Mint (www.perthmint.com/storage), you can buy gold coins or gold bars and elect to take physical delivery of the bullion or have them store your gold securely under a custodial arrangement. The Perth Mint is backed by the WA Government. 

You will need to open an account and undergo a mandatory ID check. If you open an account, you will probably want to open their Depository Online account. This allows you to trade gold online (potentially 24 hours a day), and generally has a tighter bid/offer spread than the phone or email service (known as their Depositary Program) 

In addition to the bid/offer spread on the bullion there are also transaction fees. For the Depository Online account, this is typically 0.75% on each buy and sell transaction. If you want the bullion specifically allocated to you (rather than unallocated), then the Mint charges a storage fee of 1% pa. Alternatively, you can elect to take physical delivery, in which case you will need to pay freight and insurance costs. 

2. Exchange Traded Funds 

An easier option for most investors will be buying units in an exchange traded funds (ETF). There are three exchange traded gold funds quoted on the ASX. 

Gold ETFs 

All the ETFs are backed by physical gold and have a strong record in tracking the gold price. Betashares hedges the currency exposure into Australian dollars, which means that it effectively provides exposure to the US dollar price of gold. The other two ETFs are unhedged, providing exposure to the price of gold in Australian dollars. They also allow for the units to be swapped back into physical gold. 

3. Listed Gold Shares 

Listed gold shares are highly leveraged to the Australian dollar gold price. Although they hedge some of their output and often have US dollar borrowings, most of their costs are in Australian dollars and tend to be relatively fixed. A small change in the equivalent Australian dollar gold price can have a huge impact on profitability and their share price. For example, the second largest gold producer, Northern Star Resources (NST), has traded from a low of $8.85 last November to a high of $16.77. Yesterday, it closed at $16.43. 

While there are scores of gold companies to choose from, many of them are gold explorers and the sage old advice for investors is to look at high quality producers, particularly those with low production costs and strong reserves.    

Listed below are the 5 largest gold miners by market capitalization with their broker forecasts from FN Arena. Two important notes of caution. Firstly, target prices are highly sensitive to the brokers’ long term gold price forecasts. Most brokers currently have a forecast well below the current spot price of USD 2,000 an ounce. Secondly, they are not all pure gold miners. Newcrest (NCM), which is the largest gold producer (about twice the size of Northern Star), also mines copper and silver. 

Leading Gold Miners – Broker Forecasts 

 Using sentiment, which is quoted on a scale of -1.0 being the most negative to +1.0 being most positive, the brokers (on consensus) currently rate St Barbara (SBM) as their number one pick. It has been the second worst performer on the ASX in CY20 (up 33%), compared to the best performer (Evolution Mining, EVN), which is up 61%. Evolution Mining is also seen as the most expensive in terms of the gap between the target price and the current ASX price. 

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.