Over the last ten years, investors have seemingly forgotten how and why gold fits into an investment portfolio. Many investors thought, “with stocks running higher and a decent yield in bonds, who needs an asset that usually requires a fee to store it?”
In a world where many countries have negative interest rates and in the middle of a global pandemic that has led to economic uncertainty, gold is once again reminding us of its worth, and why it should be a portion of everyone’s investment portfolio today.
Gold prices reach record highs
As an asset class, gold has traditionally been seen as a long-term store of value, an insurance policy versus either runaway inflation or geopolitical disaster. Given the headlines of 2020, we seem to be getting closer to these scenarios coming true.
Inflation: The unprecedented stimulus effort by both governments and central banks to offset the effects of the pandemic have resulted in a massive increase in monetary supply, which has the potential to cause longer-term inflation. While many pockets of the world are doing a good job getting the virus under control, by no means does that signal the end of the economic crisis. It will take years to pay off the increasing debts and fix spending deficits. Interest rates are expected to remain low for a very long time and as demand begins to recover, there is a very real chance that with it will come inflation. Gold is a way to protect against it.
Currency: Another way to look at gold is as a currency - one that can’t be printed by the central banks. Having exposure to a commodity that has a relatively fixed volume can be very attractive when the global money supply is expanding. There is a scarcity factor in gold that is not present in many other commodities. The US dollar has more recently been seen as the de facto safe-haven asset that investors rush to in times of duress. However, given the increasing trade tensions with many trading partners and questions around the way the American government is handling the COVID crisis, can this safe-haven quality last forever? As gold is traditionally priced in US dollars, a decline in the value of the greenback would be good for gold. Many are waking up to this fact and importantly we are even now starting to see gold move higher in many currencies, not just the US dollar.
As investors look to increase their allocation to gold, the question often comes up, how do I do it? Do I buy a bar and bury it in the backyard? Do I invest in the gold miners? Or do I invest in a gold backed ETF?
Buying Gold: Investing in the gold miners has been very successful year-to-date as many of these companies are benefiting from both the increase in gold prices and renewed investor attention after many years of being ignored. However, this approach takes work, as each company has different assets which come with geological, political risk, as well as operating risks. Many of these companies have improved their operations dramatically over the last few years and moved on from the days when Mark Twain famously said a gold mine is “a hole in the ground with a liar standing at the top of it.” As with all equities, investing in gold stocks will take on market risk, and is less likely to serve the purpose of adding diversification to your portfolio the way the commodity can.
At Purpose we have designed a way to buy gold that will serve investors with both the liquidity of an ETF and the comfort of knowing at any time you can have your gold delivered to you (minimum one kilogram denomination).
Purpose Gold Bullion Fund (KILO) provides the best combination of features of any gold investment product on the market. Beyond low fees, it’s secure, stored safely at the Royal Canadian Mint, easy to transact and offers the ability to redeem in physical bullion.
We believe so strongly in the case for buying gold (published May 1, 2020) that we’ve introduced five new ways to access Canada’s most affordable exposure to physical gold.
Seasonally the timing is good to take another look at gold. The summer has been a good time to hold the metal as market volatility usually ramps up into the fall. This year should be no different given the contentious election coming up in the United States. But holding for the long term would also make sense to ride out the coming storm as governments everywhere deal with the pandemic and the potential for a second wave.
Gold has been an attractive investment for thousands of years. While times have changed it’s important to remember that some things don’t change. Having exposure to gold makes as much sense now, as it did years ago. But this time getting safe and easy access to it has never been easier with Purpose Gold Bullion Fund (KILO).
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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