Prices of securities and other financial instruments are falling due to the current economic and sociopolitical climate around the world.
Investors are confused about where to place their money in light of the extreme inflation that the world’s economies are currently experiencing, one that has not been seen in more than 30 years.
In the last 20 years, gold’s price has risen dramatically from around $400 per ounce to over $2,000 per ounce. In times of uncertainty and panic, gold has proven to be a safe haven. It is long-lasting and cannot be conjured out of thin air, like the US dollar can.
Hack Capital LLC in a writeup titled ‘GOLD; Where we are headed’ said in an uncertain economic environment, central banks throughout the world would turn to gold as a hedge. Gold has historically performed well during periods of turmoil, but its recent performance has been disappointing. As a result of its poor performance, investors sold over $2 billion worth of ETFs in June alone.
It however said, when interest rates are high, as they were in the 1970s when the Fed hiked rates from 3.75 per cent to 13 per cent, gold prices skyrocketed from $30 to over $200 per ounce. Rates soared from 4.75 per cent to more than 20 per cent in 1977, while gold rose from $140 per ounce to a record high of $870 per ounce. During the 2001 to 2011 bull market, gold reached $1900 per ounce. During the COVID epidemic, gold reached an all-time high of $2200 per oz. This demonstrates that gold has always outperformed its prior peak during economic downturns.
A newly licensed Nigerian commodities exchange started trading in gold ahead of its official launch this week, the first time the metal will be offered on a bourse in the West African nation.
The Lagos Commodities and Futures Exchange is licensed by the Securities and Exchange Commission to trade gold with the specification of the London Bullion Market Association’s 99.99 per cent purity, targeting globally acceptable pricing and quality, according to the managing director of the Lagos bourse, Akinsola Akeredolu-Ale.
Gold: The viable alternative
CEO of Greenville Capital Limited, Azeez Bello noted that Gold is a hedge asset. A hedge asset aims to protect your finances from risky situations such as inflation or hyperinflation. The higher the risk of loss, the greater the importance of protection against it.
He pointed out that aside from buying physical gold, another way to invest in gold is by investing in exchange-traded funds (ETFs) that hold gold as their underlying asset or gold on the commodity exchange, like the recently listed Gold Instruments backed by real Gold on the LCFE.
He said although Gold is regarded as a hedge investment against inflation, it does not completely eliminate your potential loss. Gold prices go up when the interest rate goes down; which is directly proportional to the strength of the economy. So, in a broad sense, Gold is a hedge against an unstable economy. People see gold as a way to pass on and preserve their wealth from one generation to the next. When an official currency loses its purchasing power to inflation, which is the current situation we are witnessing in Nigeria, Gold tends to be priced in the base currency (mostly US dollar) and, thus, tends to rise in local currency terms. Gold is therefore seen as a better store of value than a local currency.
According to him, there are many ways to buy or invest in gold. Different products can be used to achieve a variety of investment objectives. Investors should consider the options available in their market, the form of investment that is appropriate to their circumstances, and the nature of professional advice they will require.
“In general, investors looking to invest in gold directly have three choices: they can purchase the physical asset, they can purchase shares of a mutual or exchange-traded fund (ETF) that replicates the price of gold, or they can trade futures and options in the commodities market. Average investors, for example, might buy gold coins, while sophisticated investors implement strategies using options on gold futures.”
According to Bello, investors can allocate capital to Gold via different avenues. The most available structured Gold derivative product in the capital market today is the New Gold Exchange Traded Fund listed on the Nigerian Stock Exchange. The Net Asset Value of New Gold ETF was reported to have grown by over 900 per cent within year 2020.
Where Gold mining stocks are listed on the bourse, investors can also take position to benefit from such companies.
Hitherto the gold market and business in Nigeria has been largely informal. However today, there are now opportunities for investors to purchase and sell physical gold bars, cubes, wires, sheets and coins through licensed commodity brokers.