For long-term investing, there are three major reasons to consider owning gold securities such as the SPDR Gold Shares (NYSE: GLD), the exchange-traded fund for gold; Barrick Gold (NYSE: GLD), the world’s largest gold company; or Premium Exploration (OTC: PMMEF), a promising small-cap firm operating in Idaho.
As the chart below shows, the price of gold rises when the value of the U.S. dollar falls. That is a classic case of supply and demand. The more of a paper currency that is created, the more the value declines as investors fear inflation eroding its value in the future.
The Federal Reserve policy of quantitative easing along with deficit spending by Congress has resulted in trillions of U.S. dollars being created without the corresponding economic growth. That should lead to inflation, which results in the decline of paper money as an asset.
When a paper currency falls in value, gold increases as investors prefer hard assets such as precious metals.
The next factor is gold’s role as a safe-haven asset for investors.
That search for political stability and economic security leads to billions in gold being purchased around the world when there is trouble in important areas.
As the crisis in Ukraine clearly demonstrates, there is still a great deal of turmoil in the world. That makes gold very appealing as a long-term holding.
The history of gold has been as an asset to hold in times of political tension and economic uncertainty due to investors losing confidence in governments to back up the paper money of that country.
With Barrick Gold operating from Canada and Premium Exploration in Idaho, there is a greater value accorded to their assets due to the position in North America.
Previous articles on this site have reported on how oil and natural gas assets located in North America are so highly valued now by investors. Just as investors from around the world are seeking energy assets in North America, it is the same for the precious metal sector.
As with oil, the Chinese have been very active buyers in the precious metal group in North America. China owns over $1 trillion in U.S. dollar assets such as Treasury bonds and is moving to diversify in a major way. High on the shopping list has been precious metal properties in North America.
From that and others buying, gold is starting to recover. There is still tremendous upside to securities in the sector. Barrick Gold, for example, is down more than 30 percent for the last year of market action, offering gains based on its assets. It is the same with Premium Exploration and its resource holdings, too.
Small-caps like Premium Holdings with properties in traditionally high-yield areas like Idaho, with such alluring potential, will be very tempting to larger entities as gold continues to soar in value.
For 2014, SPDR Gold Shares is up by double digits, after being down more than 15 percent for the last year of market action.
Those gains should spread throughout the entire sector of gold stocks, bonds, and exchange-traded funds. Like oil, the rising price of the core commodity should lift all securities in the class.
For long-term investors, Barrick Gold, Premium Exploration, and others should rise with the value of the yellow metal.
Jonathan Yates is a financial writer with degrees from Harvard, Johns Hopkins and Georgetown University Law Center. While much of his career was spent working for Members of Congress on Capitol Hill, he was also General Counsel for a publicly traded corporation; and worked in the research department of a brokerage house.