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Is now a good time for high-net-worth investors to go for gold?

While no longer a safe haven of last resort, gold’s appeal depends on inflation and monetary policy

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The shiny metal has attracted those who acquire, nurture and grow fortunes since at least the days of the Pharaohs. “Nature’s first green is gold,” the poet Robert Frost wrote, and gold is still often where investors turn first when times look troubled. Through thousands of years, gold remains important, and holds a certain fascination in many ways as an ultimate expression of wealth.

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At one time there was little question that at least some position in gold should belong in a high- or ultra-high-net-worth portfolio. That may still be true in some circumstances, but the questions of how much gold and in what form of investment are far more complicated now than the days when a loyal knight might ride up to the castle with a sack of coins for the duke.

“There are different schools of thought about gold now, and there’s no universal rule of thumb about how it fits in to an investment program anymore,” says Michael Dorfman, managing director and portfolio manager, BMO Private Wealth.

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“There used to be a view that traditionally, a high- or ultra-high-net-worth investor should have a portion of investible assets in gold, as a hedge against some kind of disaster that might befall the world. People used to have the idea of holding 5 per cent of one’s portfolio in gold,” he says.

“That’s old-school now, though,” Dorfman adds.

The view changed because of history and the advent of alternative ways for investors to protect their holdings with something other than piles of shiny metal.

The price of gold now hovers between about US$1,750 and $1,800 an ounce after climbing above $2,000 as the COVID-19 pandemic took hold last year. The current price is relatively high historically, but before the pandemic, from roughly 2013 to 2019, prices languished, shaking investor confidence in gold.

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The relatively high price of an ounce may linger, but it is not clear for how long or what will happen to gold prices as economic fallout from the pandemic subsides.

It is uncertainty that has brought investors to the gold space in great numbers this year, and it is likely what is going to keep them there.

Christopher Louney, RBC Capital Markets

It is uncertainty that has brought investors to the gold space in great numbers this year, and it is likely what is going to keep them there.
RBC Capital Markets commodity strategist Christopher Louney.

“It is uncertainty that has brought investors to the gold space in great numbers this year, and it is likely what is going to keep them there,” says RBC Capital Markets commodity strategist Christopher Louney.

In fact, few analysts see a new investors’ gold rush on the horizon as the economy lurches back to life post-pandemic. As confidence in a recovery increases, the need to park funds in gold goes down.

And indeed, both before and during the pandemic, one of the key underlying reasons for investing in gold has grown less important. While it is still a precious metal with great value, it is no longer regarded as the ultimate safe haven of last resort for wealth.

“What seems to happen is that the U.S. dollar has replaced gold as the safe haven of trade. If you look at recent crises, the dollar tends to go up and gold actually goes down,” Dorfman says.

Gold as a hedge

At the same time, gold still retains some importance for other reasons. If the recovering economy overheats, gold can still act as a hedge against inflation. Many economic experts and market analysts still fear that high inflation may be on the horizon, which would justify hedging funds in a relatively safe place such as gold.

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“It’s not a perfect hedge, though,” says Yannick Archambault, who leads the family office practice in Canada for KPMG LLP. “It depends on the direction of each crisis and the magnitude of inflation. During the pandemic, for example, gold rose from about $1,500 an ounce to more than $2,000, but it has already settled back,”

High- and ultra-high-net-worth investors who consider gold now should think of buying as a short-term tactic, Archambault says. This could help insulate portfolios from a burst of inflation. But a consensus is emerging that over the longer term, runaway inflation is unlikely because central bankers are already talking about jacking up interest rates to control it if need be.

“The reality is that it looks like governments are not going to allow inflation to skyrocket.
So you might hold gold from three to 15 months and then you’d start to unwind your position,” Archambault says.

Unlike many other investments such as stocks, bonds and funds, gold is also a commodity — it’s bling and bytes. Gold is always in demand for jewellery and it is deployed in the wiring and circuits of all kinds of high technology. According to the World Gold Council, jewellery and tech account for 40 per cent of the worldwide demand for gold.

Of course, investors do not have to load up armoured trucks with gold bars to buy the stuff anymore. “There are lots of ways for high-net-worth investors to buy; through hedge funds, for example,” Dorfman says.

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In early 2020, demand for gold dropped sharply. Jewellery demand went down 39 per cent year over year globally in the first quarter and industrial demand fell, as well. Consumer demand was affected by everything from the COVID-caused closures of stores to crimps in the supply chain, hampering online orders.

By the beginning of 2021 the picture changed, though. Worldwide demand for gold jewelry jumped by 52 per cent year over year and gold for technology went up by 11 per cent at the same time.

What’s next for gold?

What is to come? It depends on how the recovery proceeds, the World Gold Council says in its Gold Market Commentary of June 7.

“Gold’s direction is likely to continue to be driven by two competing forces. On one hand, accommodative monetary policy will keep the opportunity cost of holding gold low,” the council says. This means that if inflation festers, gold will be more attractive.

“On the other hand, higher inflation would ultimately lead to tightening monetary policy, lowering gold’s appeal when compared to other, yield-bearing assets. The key will be whether inflation is just a transitory effect or whether global fiscal stimuli and ballooning deficits result in more structural inflation, for which investors may not be fully prepared.”

Last August, RBC Wealth Management predicted high gold prices if the pandemic were to linger indefinitely, and they rose as lockdowns persisted and virus variants appeared.

But the council also speculated, “what if things suddenly get much better?” For example, what if there were to be “a vaccine narrative” with billions of people getting jabbed and COVID rates going down?

This year, “I would lean on the side of optimism,” BMO’s Dorfman says.

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