Unfortunately, some of the hysterics around gold cloud the real, and ongoing, debate as to whether a little gilt can do a portfolio good.
Since the pandemic started wreaking havoc on markets in February, gold has risen by 13.2%, from $1,648 to $1,865 an ounce, according to S&P Capital IQ, while the S&P 500 is down 1.3%. If we look at how gold has performed since March 23, the market’s trough, gold doesn’t look quite as good: it’s up 20% compared to the S&P 500’s 46% gain. Yet, with a lot of uncertainty still ahead—COVID-19 cases are still rising (in Canada, too) and a U.S. election on the horizon—a lot of investors are wondering whether gold is right for them.
A different kind of asset class
Gold has always been one of the more fascinating asset classes out there. It’s a commodity, but it’s not used in a lot of stuff other than jewellery, which means its price doesn’t follow typical supply and demand cycles. (Silver is used in a variety of technologies, and so prices can rise when, say, demand for semiconductors in a new model phone is high.) It’s considered a store of value; it doesn’t depreciate and it can always be traded for goods, so it’s a favourite asset among those who think currencies will devalue or that inflation will run amok.
Really, the price gains and losses come down to how people feel about the world. When sentiment is bearish, gold does well, and vice-versa. (In the lead-up to the recession and its aftermath—November 2008 to September 2011—gold climbed by 156%.)
A lot of people are excited about gold today because of how much debt countries around the world are accumulating at the same time. Canada’s debt is expected to rise to a mind-blowing $1.2 trillion, while the U.S. has racked up more than $25 trillion in debt. The more leverage these countries take on, the more concern there is about currency devaluation. If you keep printing money to spend on pandemic-related programs or to buy your own bonds to help keep markets liquid (called quantitative easing), then your money starts to lose its value.
If currencies devalue, gold starts looking more attractive since it’s worth what it’s worth. The counterargument is that in today’s world currencies can’t really devalue because everyone’s doing the same debt-accumulating thing. As well, it’s all relative to the U.S. dollar; if our currency falls it’s usually because the greenback strengthened. If the USD does fall, then all the countries that export to the U.S., such as Canada, will see their currencies rise, which will then harm exports and their economies, and ultimately cause their currencies to decline.
People are also worried about long-term inflation, with a lot of experts thinking that all the economic stimulus that has been pumped into the market will cause prices to rise. Typically, gold climbs along with inflation. With consumer spending down thanks to quarantine, though, it’s likely inflation will remain muted for a while.
Buy in or stay away?
So, should you buy an asset class that isn’t connected to supply and demand fundamentals, that moves on people’s emotions and that may do well if inflation rises and currencies devalue, but may not if neither of things happen? I asked Paul Harris, founder of Harris Douglas Asset Management, who said, essentially, that it depends on your view of the world. “I think gold has a place in a portfolio if you really think the world is massive disarray,” he says.