Dig gold? Gold is hot again and the number of supporters is quietly on the rise. Famously, billionaire investors Ray Dalio and Jeff Gundlach have both recently announced their support for the metal but there are many others coming out of the woodwork. After a multi-year hiatus it seems like the case for gold is strong again.
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According to Dalio:
“…the world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns (because of the enormous amount of money that has been pumped into the hands of investors by central banks and because of other economic forces that are making companies flush with cash). I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold. Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”
I have also illustrated the case for holding gold in my article “The 60/40 Portfolio is Dead“. In this article I looked at various portfolios (some including gold, others not) across different investing paradigms.
The past 40 years benefited from the tailwind of declining inflation and interest rates. Clearly, with interest rates near zero today, what worked over the past 40 years won’t work over the next 40 years. So I examined these portfolios going back to 1970 when inflation and interest rates were rising. When examined across both investing paradigms, Gold exposure was shown to stabilize returns and reduce downside.
Canadian investors looking to buy gold first have to decide whether they want to own gold mining stocks or gold bullion. My preference is gold bullion since it is a pure play on the price of gold. In contrast, gold mining stocks are influenced by extraction costs, equity risk premiums and management decisions, in addition to the price of gold. However, gold miners can be used as a leveraged play on gold since they tend to rise and fall faster than the actual metal.
For my portfolio construction purposes, an allocation to gold bullion makes the most sense.
There are a number of ETFs in Canada that buy and hold actual gold bullion stored in vaults. There are also ETFs that gain exposure by purchasing gold futures contracts. I prefer a fund that owns bullion to gold future contracts because I don’t want exposure to the added complexities introduced by the the futures market (e.g. counterparty risk, negative roll yield).
What Gold Bullion ETFs Exist for Canadian Investors?
Below I have identified 4 low cost gold bullion ETFs available on the TSX. Note that some are hedged and some are not. For a Canadian investor, owning an unhedged gold ETF, in my opinion, is the purest way to own the metal:
1a) iShares Gold Bullion ETF CAD Hedged: CGL (MER = 0.56%)
1b) iShares Gold Bullion ETF Unhedged: CGL.c (MER = 0.55%)
2a) Purpose Gold Bullion Fund CAD Hedged: KILO (MER = 0.28%)
2b) Purpose Gold Bullion Fund Unhedged: KILO.b (MER = 0.28%)
3) Sprott Physical Gold Trust: PHYS (MER = 0.48%)
4) Canadian Gold Reserves Exchange Traded Receipt: MNT (MER = 0.35%)