Gold Prices Still Worth a Look Despite Declining 10% Year-to-Date
At the time of this writing, gold was trading at around $1,200 an ounce. Year-to-date, gold prices have dropped by close to 10%.
If you are a gold bug, get ready to read headlines that call the yellow precious metal a pet rock or a useless asset for your investment portfolio. Every time gold has taken a beating over the past few years, this sort of sentiment has prevailed.
This time around, don’t expect anything to be different. In fact, don’t be surprised if the calls of gold being a pet rock become louder.
But should you completely ignore gold in the midst of all this? Should you be discouraged?
To answer these two questions in one word: no.
Why? Because gold is presenting a great opportunity.
In fact, it wouldn’t be wrong to say that the lower that gold prices go, the better the opportunity the precious metal becomes. The downside on gold may not be as big, and the upside could be immense.
How Low Could Gold Prices Go?
Before going into any details, here are some basic economics: producers tend to pull back from producing if the price of a product or commodity breaks below the production cost.
The average gold production cost is between $850.00 and $1,000 an ounce. If gold prices fall to that range, we could see a supply shock.
Keep in mind, gold producers are already struggling. Over the past few years, they have reached for grounds with the most amount of gold. Overall, their gold grades have been declining and their production has been tumbling. Lower gold prices will make it more difficult for them to produce.
So, if we assume that gold prices break to their production cost (say, to the lower end of the range, to $850.00 an ounce), we could be looking at a move down of about $330.00 an ounce from the current prices.
How High Could Gold Prices Go?
The upside is massive.
Demand for gold remains stellar. Central banks are buying, consumers in India and China remain resilient, and we are seeing demand pick up in Europe.
Mind you, risks in the global economy are increasing, investors are turning fearful, we could be on a cusp of a global trade war, major economic regions are struggling, and the list goes on. Gold is a great hedge against all these factors.
We could see a lot of gold buying.
Looking at all this, a $2,000-an-ounce gold price target shouldn’t be ruled out yet. So, if we assume that gold just makes a run toward $2,000, then we are looking at an upside of around $800.00.
So What?
Dear reader, gold seems like a good trade even if the price drops further.
For a risk of $330.00, the possible payoff could be around $800.00.
If you look from just a simple risk/reward perspective, this is not a bad trade. Please note that this is not a recommendation to buy or sell. I am just trying to show how solid an opportunity gold could be.
With all this said, don’t ignore gold mining stocks. As gold prices have taken a beating, mining stocks have faced severe scrutiny. Some of the well-known mining stocks have been selling for pennies on the dollar.
If gold makes a run for $2,000 an ounce, mining stocks could provide amazing returns.