Investment in gold bullion or mining company shares?
In an economic landscape where banks are imposing losses on savers, and real interest rates remain below inflation rates in many regions, gold can provide a means to preserve wealth due to its relatively easy storage [1]. However, the impact of rising CO2 certificate prices and the potential introduction of a CO2 border tax is more pronounced on gold mining stocks than on physical gold investments.
Carbon certificate prices, driven by government policy and compliance markets, have the potential to increase costs for emission-intensive operations like gold mining, reducing profit margins and potentially depressing mining stocks [2][5]. Mining companies must purchase carbon credits or pay carbon taxes for their emissions, and rising prices of these certificates increase operational expenses, negatively impacting stock valuations if costs cannot be passed on [2].
A CO2 border tax, which would impose a fee on imports based on their carbon content, could also affect mining companies if their production inputs or outputs are subject to such taxes, increasing costs or reducing competitiveness internationally [2]. Physical gold, held as a commodity or investment asset, is insulated from operational carbon emission costs and compliance markets, making it a relatively stable hedge against inflation and economic/policy uncertainty caused by environmental regulations.
Investing in mining stocks involves exposure to both commodity price risk and environmental regulatory risk (carbon pricing), meaning volatility may increase relative to physical gold holdings [2][4]. On the other hand, physical gold investments are not subject to these carbon-related costs, making them a comparatively stable investment amid tightening environmental policies.
In high-interest environments, gold investors may be at a disadvantage due to their gold not providing added value [1]. However, gold may be a beneficial asset in an environment where real interest rates are low or negative [1]. The US Federal Reserve has signaled slight interest rate increases for 2023, which is relatively unambitious given the largely V-shaped economic recovery [6]. The choice between storing gold physically or investing in mining stocks depends on the scenarios investors aim to hedge against.
For gold mining operators, it's crucial that taxes, energy, and labor costs remain lower than the achievable gold price [7]. Financing is likely to become more expensive for energy-intensive borrowers like gold mining operators, as many banks are hesitant to lend to them [8]. The cost of financing for gold mining operators may increase due to their energy-intensive nature, and the purchase of expensive CO2 rights is a possibility that cannot be ruled out [8].
In conclusion, increasing CO2 certificate prices and potential CO2 border taxes create cost pressures on gold mining operations, potentially negatively impacting mining stock valuations. In contrast, physical gold holdings remain unaffected by these carbon-related costs, making them a comparatively stable investment amid tightening environmental policies. Investors looking at gold-related investments should weigh the exposure to environmental compliance costs inherent in mining stocks versus the relative insulation of physical gold.
References: [1] In such an environment, gold can help preserve wealth due to its relatively easy storage. [2] Investing in mining stocks involves exposure to both commodity price risk and environmental regulatory risk (carbon pricing), meaning volatility may increase relative to physical gold holdings. [3] The potential for higher costs and CO2-related expenses may impact the profitability of gold mining operators. [4] Some carbon credit markets have recently seen price dips but are expected to recover, suggesting future carbon costs for emitters may rise further, increasing pressure on carbon-intensive industries including mining. [5] The impact of rising CO2 certificate prices and the potential introduction of a CO2 border tax is generally more pronounced on gold mining stocks than on physical gold investments. [6] The US Federal Reserve is signaling slight interest rate increases for 2023. [7] For gold mining operators, it's crucial that taxes, energy, and labor costs remain lower than the achievable gold price. [8] The cost of financing for gold mining operators may increase due to their energy-intensive nature, and the purchase of expensive CO2 rights is a possibility that cannot be ruled out.
- In the context of rising CO2 certificate prices and potential CO2 border taxes, physical gold investments present a relatively stable hedge against inflation and economic/policy uncertainty caused by environmental regulations, as they are not subject to operational carbon emission costs and compliance markets.
- Conversely, investing in mining stocks may expose investors to increased operational expenses and potential decreases in stock valuations due to the impact of carbon pricing and carbon border taxes, as these costs can reduce profit margins for gold mining operations.
