Posted by Graeme Cooper on May 1st, 2020

The case for buying gold and why KILO is the smartest way to do it

The reasons for buying gold are stronger today than they have been in decades. Governments in developed countries are monetizing debt at a record pace, running massive deficits which are increasingly being financed by central bank printing. Investors are understandably looking to alternative stores of value away from fiat currencies. While technology has led to new digital options, gold continues to prove its value as the ultimate hard currency, with a track record measured in thousands of years.

The current macroeconomic environment is precisely the type which is supportive of owning gold. Economic turmoil and market volatility are driving forces for gold, but the primary long-term factor is the perceived stability of fiat currencies.

The paper money we use has no intrinsic value linked to a hard asset. Its function as a store of value and medium of exchange is entirely based on trust in the monetary system and the bodies that regulate it, governments and central banks. The actions of governments and central banks are challenging the most critical function of money, its ability to store value. Unprecedented amounts of money printing may help support economies, but it also leads to inevitable questions about the true value of the currency.

Monetary systems run through cycles, just like economies, markets and businesses do. The biggest difference for monetary systems is the timeframe for the cycle. It’s much longer and often more difficult to estimate which point of the cycle we’re in at any given time.

A typical cycle of a monetary system flows through five phases:

1)      Hard currencies with intrinsic value (gold and silver, for example) are the only trusted forms of money. Their value is easy to understand, but often difficult to divide and use as a medium of exchange.

2)      Governments and central banks create and print paper money with a fixed link to a hard asset. This linked paper solves the issue of transactability of hard currencies.

3)      Finite supply of the linked paper limits growth and puts pressure on the overall system as debt builds. Governments and central banks sever the link to the hard currency, creating more flexible fiat currencies.

4)      Increasing debt loads and dampened economic growth require more money in circulation to sustain the system, especially during periods of shock. Growth continues and wealth accumulates as more fiat currency is injected into the system.

5)      The stability of fiat currency comes under question as more of it is printed to sustain the system. Users become increasingly concerned the value of fiat currency is eroding and begin transferring paper wealth back into currencies and assets with intrinsic value.

For those interested in a deeper dive, we recommend reading Ray Dalio’s recently published chapter from his upcoming book, which addresses the cycle in historical context.

While it’s hard to pinpoint precisely, a lot of evidence and common sense suggests we’re getting deep into the final stage. Holders of wealth are becoming more skeptical of currencies as a store of value and are allocating capital towards alternatives that hedge against inflation.

Digital alternatives like Bitcoin and Ethereum are interesting and have their own sets of pros and cons. However, they are still young relative to other assets and investors are still trying to uncover their intrinsic value, a discovery process which often adds extreme volatility into the mix. This undermines their utility as a store of value.

We believe gold remains the best alternative store of wealth. Its utility is well understood, its supply is well understood and it has thousands of years of history supporting it as a safe haven asset. And we’ve got the simplest way to get exposure to it.

Why Purpose Gold Bullion Fund (KILO)

Purpose Gold Bullion Fund (KILO) provides the best combination of features of any gold ETF or fund on the market. It is the most secure, it is easy to transact and it offers the ability to redeem your physical gold, if you want to store it safely yourself. It also has the lowest fee among its closest competitors.

Beyond low fees, it is the only gold investment product on the market that combines the security of fully allocated and segregated storage at the Royal Canadian Mint with the flexibility of ETF and mutual fund structures. Closed end alternatives can trade at significant premiums or discounts to NAV, creating price risk on entry and exit, while other ETF and mutual fund options have greater counterparty risk with exposure to the stability of the financial system.

KILO is available in multiple versions to best suit your investment needs. It can be purchased as an exchange-traded fund (ETF) or a mutual fund (currency hedged only), depending on what fits your account best. If you have a particular view on the direction of the Canadian dollar, you can buy it hedged or unhedged. And if you want to buy it in US greenbacks, we have a US dollar version as well. In any format, you are getting pure exposure to physical bullion, stored at the Royal Canadian Mint.

How it works

When an investor buys KILO, new units of the fund are created with same-day exposure to physical gold bullion. We buy kilogram bars of gold (hence the ETF ticker!), sourced globally by our partners at Velocity Trading. Those bars are stored safely at the Royal Canadian Mint vault in Ottawa, segregated in a specific section exclusively used by us to hold our investors’ gold.

When an investor sells KILO, they can either take it in cash or in physical gold bullion, with the only extra cost being the price of delivery. Physical redemptions can be made at a minimum amount of one kilogram, with fractional amounts paid in cash. Sellers can expect to take delivery of their physical gold within ten business days of the redemption date.

Purpose Gold Bullion Fund tracks the gold price using the New York 4pm Reference Rate. Most other gold funds use the London rates, which can create some minor differences intraday if you’re comparing. However, the New York and London rates are virtually identical over time.

KILO.U tracks New York 4pm Gold Price in USD

The fund was initially invested with a NAV per share of $20 on October 30, 2018, which set the ratio of 1 share to 0.0123 ounces of gold. That works out to 1 share per 0.3487 grams of gold. This ratio has been maintained since inception.

Want to know more?

Visit our fund page to learn more.

— Graeme Cooper is Vice President of Product at Purpose Investments


All data sourced to Bloomberg unless otherwise noted.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained on this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice and neither Purpose Investments Inc. nor is affiliates will be held liable for inaccuracies in the information presented.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. The indicated rate of return is the historical annual compounded total return including changes in share/unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Fund mentioned in this story