Many investors are starting to get interested in gold again. You can invest in gold by purchasing actual bullion (bars or coins) from a dealer, by buying a fund that holds bullion, by buying a fund that invests in gold mining companies or by buying a fund that gains exposure to gold via the futures market.
Personally, as a strategic holding I prefer to use exchange traded funds that buy and hold fully-allocated gold bullion. I want exposure to the underlying metal, not necessarily to the factors driving the success or failure of individual gold mining companies. However, during a gold bull market both can perform well.
For Canadian investors, below I have listed out the gold ETFs and closed-end funds that trade on the TSX. For your reference, I’ve also listed how they gain exposure to gold, asset size, ticker and fund manufacturer.
Note: This table is best viewed on desktop
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Gold has a tendency to decline during crises. One only has to look at 2008 for a recent example.
In 2008, gold prices declined along with everything else. However, after the immediate crisis ended gold prices started a dramatic rise, reaching a record high (around $1900) in 2011.
So why does gold fall during severe market stress? There are a few possibilities:
1. Forced selling to cover margin calls.
As markets collapse, anyone who bought stocks on margin (i.e. borrowed from their broker) will need to put up additional collateral or sell their holdings. Those who don’t want to sell need to add cash to their accounts. On way to do this is to sell holdings that have performed well. Up until last week, gold was performing exceptionally well.
2. Sell winners.
Investors sell their winners not only to fund margin calls. They might sell winners so they have cash to redeploy into cheaper stocks. Or they may simply want to increase their cash buffer. Investors tend to sell winners because it is psychologically easier to lock in a gain than a loss.
Most financial crises are accompanied by a dollar shortage. One reason is because investors are reallocating to US Treasuries (which require dollars to buy). The US dollar (and the dollar-denominated Treasury market) is viewed as a safe haven in times of crisis. This causes the value of the dollar to rise. When the value of the dollar rises, the number of dollars required to purchase any asset priced in dollars declines. Gold is priced in US dollars.
If this crisis plays out like the last one, central banks will eventually inject massive liquidity into the financial system, which is ultimately good for gold.
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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.
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: