The year of the Mayan ‘apocalypse’ has come and gone, and yet that sense of impending doom persists as it has throughout human history.
That sense of doom has driven people to accumulate gold in the belief it is the only investment that can store value in turbulent times.
Doom and gloom and gold come in waves – and we are somewhere in the midst of the latest. Twelve consecutive years of price advances have brought bullion from $280 (U.S.) an ounce in 2000 to $1,700 (U.S.) at the end of 2012.
More recently gold has taken a step back from its advance by 8 per cent since last fall. While some see it as the beginning of the end for this gold wave, Paul de Sousa, executive vice-president at Bullion Management Group, considers the sell-off a small pause in a continuing meteoric rise.
“I’m expecting a thirteenth consecutive year of positive returns.”
Bullion Management Group is Canada’s first investment company to offer physical bullion for average investors to store in their registered retirement savings plans (RRSP) and tax free savings accounts (TFSA) – well, not exactly. The roughly $650-million in bullion is stored in an insured Bank of Nova Scotia vault in downtown Toronto for safe keeping.
The company’s flagship fund, BMG BullionFund –A, has produced an average return of 8.4 per cent each year for the past 10 years, even after factoring in an annual management expense ratio of about 3 per cent.
Mr. de Sousa says the doom-and-gloom factor will continue as worldwide debt levels rise and governments print more money. He says the primary danger zones are not over-leveraged second-tier countries, such as Greece and Spain, but rather the United States with its looming debt ceiling debate next month.
“It’s not just the $16-trillion debt that the U.S. has. It’s all the unfunded liabilities – Medicare, Medicaid, social security. When you add that up it comes to about $120-trillion,” he says.
Naturally, Mr. de Sousa’s advice to retail investors is to buy into his gold funds but he says the amount of gold in an individual portfolio depends on the investor. If you share his view of the world, he suggests a 15-per-cent to 20-per-cent weighting. If you don’t, he says 7 per cent is a more suitable allocation to balance other fixed income and equity investments.
He also cautions investors about the difference between gold bullion and gold mining companies, which carry balance-sheet risks just like any other company. While the price of gold has risen more than 12 per cent over the past five years, shares in mining giants Barrick Gold Corp. and Goldcorp Inc. have fallen 26 per cent and 23 per cent, respectively.
Over the same period, returns for the average precious metals equity mutual fund have been flat to negative – with an average 23-per-cent loss last year. “Bullion represents money and mining companies are equities,” he explains.
There are several gold exchange traded funds (ETFs) available on the market that track the price of gold through derivatives, but Mr. De Sousa says only gold is gold. “We consider everything that is not bullion, paper.”
TD Asset Management vice-president Ari Levy oversees the $200-million TD Precious Metals fund, which holds most of the big gold miners. Currently the fund is fully invested and he says now is the time for investors to buy beaten down gold stocks.
“The fiscal cliff was just round one,” he says. “The lull in gold prices has pushed equities down, providing a more attractive point of entry.”
He says gold stocks could get a further boost from mergers and acquisitions spurred by low stock prices.
Credit rating agency Standard & Poor’s may disagree. It has downgraded several gold producers over the amount of debt they have been amassing to boost their share prices.
In a recent report S&P notes that Goldcorp, Barrick Gold, Newmont Mining Corp. and Kinross Gold Corp. have a combined debt of $25-billion. “Some of these companies are taking on unprecedented levels of debt to fund large, risky investments or acquisitions to increase – or even merely to sustain – gold output,” it says.
That’s just one reason financial adviser Cynthia Kett from Stewart & Kett Financial Advisors suggests investors simply steer clear of bullion, gold stocks and gold equity funds.
“If people think the sky is falling they might want to hold a position in gold because they think there is capital preservation in it. I think that gold is just too volatile. I don’t think it’s necessary to have in a portfolio,” Ms. Kett says.
If clients insist on taking a position in gold to complement their core holdings she advises against more than 5 per cent in any one company and no more than 15 per cent in the sector.
She says gold as a commodity would be preferable to gold stocks or equity funds for capital preservation or as a hedge against inflation – but it’s not the only way.
“It is a way to diversify your portfolio, just as some people invest in commercial real estate as an alternative.”