We tend to get enamoured with anything “new and exciting,” and the general affinity toward cryptocurrencies such as bitcoin has almost reached cult status. While bitcoin isn’t necessarily new and has definitely proven itself as a more enduring asset than many had predicted, its true investment merit is still speculative and remains to be seen. Gold on the other hand, has been used as a store of value and medium of exchange for centuries, and more increasingly as an effective portfolio diversifier. It may not be as exciting and fast moving as the price of cryptocurrencies, but it serves as a great investment tool, especially in this highly volatile, negative real rate environment.
Diversification that works
We frequently hear about the benefits of portfolio diversification, but it doesn’t always work when we need it to. This is because many asset classes are increasingly correlated – as market uncertainty and volatility rises, correlation tends to also increase. As a result, investors are left without portfolio diversification when they need it the most.
That’s where gold is different. Gold has historically exhibited a low to negative correlation to major asset classes and has proven to be a genuine diversifier in times of greater market volatility, resulting in lower portfolio volatility and preserved purchasing power.
Source: Morningstar Research Inc., data from January 1, 2001 to November 30, 2020. Correlations are calculated from monthly returns in Base Currency. Asset classes represented by the following indices — Canadian Aggregate Bond: FTSE Canada Universe Bond Index, US Aggregate Bonds: Bloomberg Barclays US Aggregate Bond Index, Global Equities: MSCI AC World Index; U.S. Equities: S&P 500; Canadian Equities: S&P/TSX Composite Index, European Equities: MSCI Europe Index; International Equities: MSCI EAFE Index.
Gold isn’t just a tactical asset for times of crisis. As a tangible asset that’s been around for centuries, gold holds up as a historical store of value without the counterparty risk of stocks and bonds. In fact, the price of gold has increased from $43.63/oz to $1887.60/oz. since 1971.
Source: Morningstar Research Inc., as at December 31, 2020.
Gold’s role in a portfolio
When properly allocated, gold has an important role to play in both enhancing returns and reducing risk. Overall, analysis suggests that adding gold to a typical 60/40 portfolio has resulted in tangible improvement to absolute and risk-adjusted returns on a long-term basis, while protecting capital in periods of elevated market volatility.
Source: Morningstar Research Inc., from Mar 1, 1999 to Nov 30, 2020. Performance in CAD. Notes: Equity allocation comprised of MSCI World Index CAD. Fixed income allocation comprised of Bloomberg Barclays Global Aggregate Bond Index (CAD-Hedged). 1Covid-19 Drawdown from Feb 19, 2020 to Mar 23, 2020. 2Global Financial Crisis from Aug 11, 2008 to Mar 9, 2009. 32002 Recession from Mar 19, 2002 to Jul 23, 2002.
Cost-effective and convenient gold exposure
The gold market is large, global and highly liquid, but owning the physical asset can be complex and inconvenient. This is where physical gold-backed ETFs can provide easy access to the properties and security of physical gold ownership, without the complexity and inconvenience of arranging for storage and insurance separately.
CI Global Asset Management’s recently launched CI Gold Bullion Fund (TSX: VALT, VALT.U) provides exposure to the physical gold bullion market in London through an ETF. The ETF is the lowest fee1 gold bullion fund in Canada with a management fee of 0.155%, giving investors a convenient and cost-effective way to own physical gold.
While gold, one of the world’s oldest currencies, might not be as exciting as cryptocurrencies, it has a proven history of protecting against negative real rates and currency debasement, while also showcasing a long track record of providing investors with diversification and better portfolio risk-adjusted returns.
Gold is not only a useful long-term strategic component for portfolios, but one that is increasingly relevant in this current low-yield, highly volatile environment.
1CI Global Asset Management as at January 6, 2021.
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Published January 19, 2020.