In mid-February we posited the idea that gold might hit $3,000 per ounce in the not-to-distant future, and within a month the precious metal had pushed through this level.

After sharing in the broader sell-off which followed ‘Liberation Day’, gold has begun to shine once more and in this article we examine the prospects for the precious metal to hit the $4,000 mark and the different ways investors can achieve gold exposure.

The selling in gold follows a similar pattern to that which we have seen in previous market sell-offs. Because gold is relatively easy for investors to buy and sell, it is often a victim of initially indiscriminate selling before its safe haven credentials come back to the fore.  

'PRICES LIKELY TO RISE FROM HERE'

As Capital Economics climate and commodities analyst Hamad Hussein says: ‘While gold prices have edged down since “Liberation Day”, this is not unusual during a sudden equity market sell-off. In fact, gold’s track record suggests prices are likely to rise from here, especially if a worst-case scenario for the US economy and equity markets did materialise.’

Gold, which has limited applications in industry, tends to be in demand during periods of economic or geopolitical strife, when inflation threatens paper currencies or there are significant falls in bond and equity markets.

The precious metal’s role as a store of value goes back thousands of years and investors often reach for it in a crisis because, unlike currencies, its value cannot be manipulated through adjustments to interest rates. Also, it is a scarce resource which is costly to mine, so it’s supply cannot be increased rapidly unlike the supply of money.

A longer-term driver has been buying by central banks looking to diversify their reserves out of dollars. This has been particularly evident with countries like Russia and China who have had been at odds with the US.

As shown on the chart, based on data from the World Gold Council central banks have been net buyers of gold for 15 consecutive years up to the end of 2024 and with this trend already having accelerated in recent years the current US administration’s policies may encourage further diversification away from dollar-denominated assets.

The chief executive of small cap UK-listed gold miner Thor Explorations (THX:AIM), Segun Lawson notes: ‘A trend we see on a daily basis at the moment is gold dropping in US daytime and then rising in Chinese daytime, reflecting Chinese buying, and that seems unlikely to change.’

A second and somewhat related catalyst which is coming to the fore right now is reduced appetite for other traditional ports in a storm, perhaps most notably US government debt, amid investor concern about the size of the country’s deficit and the credibility of the current trade policy. Weakness in the US dollar is another tailwind given gold is denominated in dollars. 

At the same time, in the background, geopolitical concerns remain relevant given the ongoing conflicts in the Middle East and in Ukraine.

Negatives for gold include the excellent run it has already enjoyed, its limited practical usage and the possibility that jewellery-related demand might suffer if we see prolonged economic weakness. A more lasting resolution to current tariff uncertainty could also clip gold’s wings.

Also, gold itself offers investors zero income unlike alternatives like stocks, bonds and cash.

While this will always count against its attractions relative to other asset classes, a solution to this conundrum for individual investors could be to buy gold miners who have the capacity to pay dividends out of their cash flow.

We have previously highlighted exchange-traded fund iShares Gold Producers (SPGP) as a relatively low-cost way of getting diversified exposure to this area and it has delivered a one-year total return of 44.4%.

OTHER WAYS TO GET EXPOSURE

Capital preservation trust Ruffer (RICA) has been investing in gold mining shares rather than bullion itself and notes it has benefited from having done so during the recent volatility.

In its latest commentary, the trust says: ‘The largest contributions came from precious metals, primarily through gold mining companies and silver bullion, which appreciated as demand for safe haven assets grew. Notably, gold miners outperformed gold bullion – which we do not currently own – over the quarter, after largely tracking the gold price for much of 2024.’

A relatively low-risk way of getting gold price exposure and some, albeit modest income, would be to look at Wheaton Precious Metals (WPM).

Wheaton isn’t a gold miner as such, it is a royalty streaming company – providing money to miners to help them develop projects in return for a percentage of their production.

As Berenberg observes: ‘While the shares can be viewed as a gold proxy, we think Wheaton offers a different dimension to the physical metal, through both yield (a dividend yield of around 1%, with scope for increases) and scope to grow production to one million ounces per year, which should translate into increased free cash flow and dividends.

‘This is supported by a net-cash balance sheet, which provides plenty of flexibility to pursue value accretive transactions. Growth could also come through longer dated projects currently in the portfolio.’

A HIGHER-RISK OPTION

Investors comfortable with taking on greater risk could look at Thor Explorations, which has just announced a maiden dividend and has committed to this payout for the next two years.

The annual dividend of 2.75p will be paid on a quarterly basis and implies a yield of some 9.2% at the current price of 30p per share.

This generosity to shareholders is underpinned by the ramp-up in output from its Segilola mine in Nigeria.

Canaccord Genuity forecasts that even after paying this dividend the company would finish 2025 with net cash of around $144 million if gold prices hold above $3,000, which means it still has the means to invest in exploration opportunities across its portfolio of assets in Nigeria, Cote D’Ivoire and Senegal.

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