Whenever the world feels like it’s falling apart, the gold bugs emerge from their months-long hibernation, and buzz about telling anyone with ears about why the yellow metal is going to save us all. While you don’t see as many “sell your gold” commercials anymore, the bugs are out there, trying to convince everyone that the U.S government is on the verge of collapse and that fiat currency will soon be a thing of the past.
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.
A lot of people like owning at least some gold because it can act as a portfolio diversifier—experts typically recommend between 5% and 10%. If the markets fall, gold does tend to go up, which then balances out your losses. However, Harris says that most people don’t hold enough gold for it to make a difference. (If you own 80% stocks, he points out that holding 5% in gold won’t do a whole lot.)
If you really think that the world will continue to go sideways for a while, that rising cases could shut down economies and that governments will keep spending, then owning some gold could be helpful as the precious metal should rise. In June, Goldman Sachs revised its 12-month gold price forecast to $2,000 an ounce, up from $1,800, saying, “We believe that debasement fears remain the key driver of gold prices in a post-crisis environment such as this.”
Harris adds that owning gold now could be a good thing because interest rates are so low. One knock against the metal is that it doesn’t offer a distribution, but now, with rates so low, you can’t earn anything in bonds. So you’re not losing out on any potential income by owning it, he says.
While Harris doesn’t own gold—he doesn’t think inflation will get out of control or that currencies will devalue—he can understand why someone might want to own some. However, when it comes down to deciding what to buy, he suggests sticking with the actual metal, which you can get by purchasing GLD, an ETF from SPDR that invests into actual gold.
Gold companies are much riskier to own as many other things factor into their stock price. While they do tend to do better than the price of gold on the way up—the S&P Commodity Producers Gold Index has climbed by 85% since March 23—they tend to be poorly run companies that operate in difficult parts of the world. As soon as the price turns, these businesses usually fall hard.
And that is the difficult aspect to owning gold overall. Just as quickly as people can become bullish on the commodity, they can turn on it, too. If economies start improving, if a vaccine is found sooner than later, if the world doesn’t feel like it’s going to end, then the gold bugs, and the gold price, will retreat.
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