As good as gold

Editor's Note

This is article is sponsored by Richardson GMP Limited.

Having hit record highs this year, breaking the US$2,000 per ounce mark, gold is drawing a lot of attention and sparking questions from the average investor as to whether they should have gold in their portfolios.

With experienced portfolio managers on the team, Hall O’Brien Wealth Counsel can adequately determine if investing in gold is an appropriate strategy for your portfolio. There are three primary reasons investors buy gold: as a hedge, as a safe-haven or as a direct investment.

Gold as a hedge

Hedges are investments that offset losses in another asset class. Many investors buy gold to hedge against the decline of a currency, namely the U.S. dollar. The U.S. dollar is viewed as one of the world’s most important currencies. When the value of the US dollar falls, investors flock to the security of gold that has maintained its value through history. 

Additionally, when there is geopolitical uncertainty, gold is currency agnostic and doesn’t suffer from currency devaluations when there is trouble in a particular country or region. Gold is considered an excellent long-term store of value. Since 1900, all major currencies have depreciated relative to gold.

Gold has historically been an excellent hedge against inflation because its price tends to rise when the cost of living increases. In medieval times an ounce of gold could buy a knight a suit of armour. Today an ounce of gold can buy a businessman a bespoke suit. The purchasing power of gold has not eroded with inflation. 

Gold as a safe haven

However, gold is often a better hedge against financial crises than a hedge against inflation in the short term. The price of gold tends to rise during periods of high inflation, but this has not necessarily played out during periods of high inflation. 

As such, gold is often characterized as a safe-haven asset: investors tend to flock to the precious metal when they are uncertain or nervous about other asset classes. When investor confidence in the stock market is low, gold is seen as a safe place to invest. Gold has historically tracked in opposition to the stock market of economic swings and therefore has provided a safe harbor when there is uncertainty in the markets.

Gold as a direct investment

Others continue to buy gold because they see it as a finite valuable substance with many industrial uses. They believe that supply constraints will eventually force up the value of this metal. 

Some precious metal investors advocate for an allocation to silver in addition or instead of gold. Since silver has many of the same characteristics as gold and is more widely used as an input in industrial applications (12 per cent of gold supply goes to industrial use, compared to 56 per cent of silver). Silver is also a bigger market in terms of volume and is more affordable than gold on a per-unit basis. However, despite the higher consumable demand, the price of silver is more volatile than that of gold.

Physical gold/paper gold or gold producers?

For gold to truly act as a safe haven, investors must buy physical gold or investments that are convertible to physical gold. Not all gold funds are fully backed by physical gold. Some only track gold futures (“paper gold”) and investing in gold producers adds layers of other investment risk that is solely related to the financial health of the individual company, the quality of its reserves and its cost efficiency in extracting the precious metal to name a few.

Does it belong in my portfolio?

At the time of writing, gold prices have pulled back about five per cent from the all-time high and many are asking whether it remains a relevant addition to one’s portfolio. Without a crystal ball, it is impossible to predict how gold prices may behave in the short to medium-term. However, many factors prevalent today have historically been positive for gold: 

  • The longer term expected economic environment of low real interest rates (given the Fed’s “lower-for-longer” strategy)
  • Rising inflation expectations (in light of the unprecedented global debt levels as a result of the liquidity and other support measures provided by governments in the face of COVID-19)
  • A lower U.S. dollar outlook.

On the other hand, gold can be a highly volatile investment and prices could fall dramatically depending on how the economic recovery continues to unfold following the pandemic. Gold does not produce any income and is tied to investor speculation and there is a cost to securely storing the physical asset.

It is important to talk to your advisor to determine whether an allocation to this asset is appropriate in your portfolio and where it might fit in terms of which account to hold it in so that the potential return can be maximized in the most tax-efficient manner.

Our team is uniquely positioned to help you consider questions like how to diversify your portfolio in the context of your investment capacity, horizon and tolerance and to develop a financial investment plan that puts you in the best position to maximize your wealth and live the life you want.

This article is supplied by Joelle Hall of Hall O’Brien Wealth Counsel, a portfolio manager and investment advisor with Richardson GMP. Richardson GMP Limited, Member Canadian Investor Protection Fund.

Hall O’Brien Wealth Counsel specialize in tax-efficient portfolios and planning. We speak your language so you feel confident in the plan we implement together. 

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

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