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In addition to not acting as a hedge against equity market losses during the pandemic and post-pandemic inflation, one expert says his charts show gold and gold stocks also failed to move inversely during the technology crash of 2000 or during the 2008 global financial crisis.DENIS BALIBOUSE/Reuters

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Doug Pollitt is a self-proclaimed gold bug. The son of veteran Bay Street gold bug and founder of Pollitt and Co. Inc. – Murray Pollitt – has carried on his father’s message that no investment portfolio is truly diversified without a stake in bullion.

“There should be some core bullion holding. It doesn’t have to be much. It depends on the portfolio and the circumstances,” he says.

As a gold analyst, he carries on a tradition going back thousands of years that views gold as a way to store value over long periods of time, and a hedge against other asset classes through periods of economic turmoil and political strife.

“If gold has one job, it’s to do well when nothing else does,” Mr. Pollitt says.

It can be difficult to prove or disprove the case for gold as an effective hedge mostly because it’s difficult to find a benchmark to measure it against. The price of gold has fallen in relation to the U.S. dollar over the past three years – a period of economic turmoil caused by the pandemic and political strife from Russia’s invasion of Ukraine.

But Mr. Pollitt says it’s the way the world’s major central banks have been dealing with turmoil and strife that will put the shine back on gold. Going back to the global financial crisis of 2008, central banks have taken unprecedented control of the economy in large part by printing more money and lowering trendsetting interest rates to stimulate activity, and then raising them to cool inflation, as is the case right now.

“Gold will really go when people lose confidence in the central banking community’s capacity to deal with inflation. We’re not there yet,” he says.

Mr. Pollitt’s advice to advisors is to steer clients toward gold funds with a portion allocated specifically to gold.

“Buying the metal is best,” he says. “The fund actually buys gold and it’s 100 per cent paid for and segregated from the other holdings.”

Mr. Pollitt is less keen on gold derivatives such as the passive SPDR Gold Shares GLD-A exchange-traded fund. He says it’s better to own gold producers through active managers who can identify companies that best manage the supply and demand fundamentals behind bullion.

“Gold portfolio managers are going to be way more informed than almost all advisors and individual investors will ever be,” he says. “It’s a sector where being informed really makes a difference.”

Gold’s historical contradiction

But Robert Sneddon, founder, president and chief portfolio manager at CastleMoore Inc. in Toronto, says gold is not a place to “hide out. History shows that.” As a technical analyst, he charts the past performance of securities such as gold to help determine how they will perform in the future.

In addition to not acting as a hedge against equity market losses during the pandemic and post-pandemic inflation, his charts show gold and gold stocks also failed to move inversely during the technology crash of 2000 or during the 2008 global financial crisis.

“If you look back at 2008, gold went down with the market,” he says, adding that in most cases any inverse reaction is short-lived.

“There’s a bit of a knee-jerk reaction because of the narrative. That narrative hangs around for a little bit but it doesn’t last very long.”

Mr. Sneddon adds he doesn’t look at gold as any kind of a hedge per se.

“It doesn’t actually operate as a hedge. Gold bugs take over the narrative for a bit and when you look at the price action it doesn’t match up,” he says.

One possible exception, according to Mr. Sneddon, is the U.S. dollar.

“It’s usually somewhat inverse. When gold goes up there’s usually some level of weakness in the U.S. dollar and when gold goes down there’s usually some type of strength in the U.S. dollar,” he says.

Gold charts its own course

Regardless, gold-related investments continue as staples in many Canadian portfolios.

“We do it because it’s expected of us,” says Bill Harris, partner and portfolio manager at Avenue Investment Management Inc. in Toronto. He advises 5 to 6 per cent of his client portfolios be allocated to the sector as a type of hedge against a financial disaster not seen in recent history.

“It’s a meltdown hedge. In other words, if things are going really badly, it hedges against that,” he says.

However, he considers gold’s most valuable attribute is its ability to not move with any other asset class.

“You don’t have to buy it as a hedge against disaster. It’s just another asset class. It’s an uncorrelated asset class. It smooths the portfolio over time,” Mr. Harris says.

But gold doesn’t do what you want it to do, when you want it, he adds.

“You have to take a 40-year view on your portfolio, which people hate doing,” he says.

Perhaps the biggest attribute that sets gold apart from most asset classes – and the elephant in the room for any discussion on the value of gold – is the fact that there’s no correlation between its price and its intrinsic value.

Prices for other commodities – such as oil, copper or wheat – are based on demand, which is derived from their functionality. There are a few practical uses for gold, but demand for them doesn’t drive its price.

For Mr. Harris, it’s a useless point. “I don’t try to rationalize it,” he says.

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