Gold and Your Portfolio: Is it Time to Invest in Gold?

Spring 2010 CSANews Issue 74  |  Posted date : May 27, 2010.Back to list

Throughout history, gold has been a standard of economic value, a ceremonial ornament, an artistic medium and an almost-universal currency. Gold's position of privilege seems secure to this day; economists continue to use the price of gold as an indicator of general economic trends, and as a measure of the overall level of economic uncertainty in the world.

Recently, gold has become even more valuable than ever. On December 1 of last year, fuelled by worries over a potential bond default by Dubai World (the government-backed company behind many of the emirate's ambitious real estate projects), the price of an ounce of gold hit an all-time high of US$1,198.

It's about time. While gold has long been coveted for jewellery, as an investment, it has left a lot to be desired. Since reaching its nominal high of US$850 an ounce in 1980 (that's more than $2,300 in today's dollars), gold entered a slump that lasted for more than two decades. On April 3 of 2001, the price of gold dropped to US$257 an ounce, fully 55 cents below where it was on May 17, 1979.

Since the 2001 low, the price of gold climbed steadily, doubling in price between 2001 and 2006, but remaining well below the highs established 25 years prior. Then the world changed. As the U.S. housing market collapsed due to the subprime mortgage crisis, investors once again viewed gold as a safe harbour in the economic storm. On March 17, 2008, the day after investment bank Bear Stearns was sold to JP Morgan Chase for the fire-sale price of US$2.00 a share, the price of gold broke through US$1,000 an ounce for the first time.

All of which raises the question:  should you invest in gold?  Perhaps. But before you answer that, it's a good idea to review some of the reasons why gold is such an important financial commodity.

Gold as security

Traditionally, gold has performed well in times of economic turmoil. That's one big reason why the price of gold is so high today: economists, analysts and investors continue to be unsure about the strength of the economic recovery in the United States and other parts of the world. In the face of such uncertainty, many investors see gold as a stable store of value.

By continuing to hold gold in your portfolio, you could be providing yourself with a valuable hedge against poor performance in other areas of the market. In addition, inflation has traditionally had less of an impact upon gold than it has had on other assets such as cash, bonds or even stocks. Should inflation rise sharply—as some economists suggest it will over the coming years—gold could be an excellent way to offset the gradual erosion of your savings over time.

Politics and gold

In the past, the price of gold has been particularly sensitive to global political events. For example, in the months after Sept. 11, gold performed well as investors became anxious about the long-term implications of the war on terrorism. On the other hand, gold has remained relatively unaffected by events such as the Gulf War, the attempted coup in Russia or continuing political tensions in China. 

While it's difficult to know how geopolitics will affect the price of gold in the future, it's safe to say that gold remains an alternative to major world currencies (such as the U.S. dollar), which can be even more dramatically affected by politics than gold.

Prosperity in Asia

Gold isn't just a financial instrument, it has value as a consumer item too. In fact, the World Gold Council reports that fully 68% of the demand for gold from 2004 to 2008 was for jewellery. Much of that demand comes from India, China and other Asian nations.

And this is perhaps the best news for gold. As the economies of India and China expand and quality of life increases, consumers in those countries will likely increase their consumption of the precious metal, driving world demand for gold even higher. This increased demand could see prices rise accordingly, giving gold the prospect of becoming an even more valuable investment than it already is.


Options for investors

An investment in gold doesn't necessarily mean hoarding heavy bricks under your floorboards. There are many different ways to put gold in your portfolio:

Gold bullion

The most direct method of owning gold is to own the physical metal. For investors looking to make a significant purchase, it's possible to buy gold bars. (At current prices, the standard 400-ounce brick held by most of the world's central banks would cost about US$450,000.) However, the vast majority of investors will find bullion coins or wafers a more viable option; 24-karat jewellery is another alternative.

Most banks can arrange for purchases of gold bullion; specialty dealers are another avenue. Keep in mind that fees and associated markups can be high when buying physical gold. This is especially true when buying gold jewellery, where the complexity and artistry of a given piece can form a significant component of the total price.

Obviously, when buying physical bullion, storage is an important consideration. A safety deposit box at a reputable bank is probably the easiest option here, although a home safe with a professionally installed electronic security system might be appropriate for small quantities. Either way, you'll want to think carefully about your storage requirements and ensure that you have a safe place to put your gold before you actually buy.

Mutual funds and ETFs

A number of mutual funds, exchange-traded funds (ETFs) and other pooled investment products provide investors with exposure to gold and other precious metals. Over the past several years, ETFs in particular have become a preferred vehicle for investing in commodities such as gold. It's easy to see why: unlike physical gold, ETFs are highly liquid (they can be sold on a stock exchange within minutes), easily priced and have no special storage or safekeeping requirements.
That said, it's a good idea to investigate a fund's prospectus and know exactly what it is that you're buying. Many ETFs and gold mutual funds are "pure" gold plays - i.e. they invest only in physical bullion. Others add similar or closely related investments (gold mining stocks; other precious metals such as silver or platinum; gold futures, etc.) as a way of diversifying their portfolios. That's not necessarily a bad thing, but it may or may not be what you're looking for, so make sure to check before you buy.

Gold stocks

Another option is to invest in the companies that produce gold. Canada is home to a number of world-class gold producers, including well-known companies such as Barrick Gold, Goldcorp, Agnico-Eagle Mines and many others. For those with a higher risk tolerance (and nerves of steel!) there are a number of junior and speculative gold mining companies listed on the venture exchange that offer high-risk, high-return opportunities.

Keep in mind, though, that gold producers' stocks don't always rise in tandem with the price of gold. In many cases, management changes, operational issues, currency exchange rates and other factors can influence a gold miner's stock price - for better or for worse - regardless of the current direction of the price of gold.

If you'd like to know more about investing in gold, make sure to speak to a financial professional. Working together, you can determine how gold fits into your financial plans, and what form that investment should take inside your portfolio.

Related links
The Amazing Canadian Dollar
How to Fix a Broken Retirement