Safe haven or gilded cage?

Be cautious when responding to the lure of gold

Gold has in recent weeks become more interesting to investors. After a lengthy period during which an ounce of gold traded around US$1,500 per ounce, it notched up slightly after the March stock market meltdown, to around US$1,700. Since the beginning of June, though, it has been climbing steadily, edging toward a historic high of US$2,000 per ounce in the final days of July.

Contributing to the price surge, investors have been fretting increasingly about the sustainability of stock market gains in the face of resurgent COVID-19 cases in the U.S. and Europe, a weakening U.S. dollar, plummeting real interest rates, rising U.S.-China trade and diplomatic tensions, and growing concerns over global economic recovery. It’s a perfect laundry list of trouble that helps define gold as a safe haven asset.

The yellow metal does tend to be a kind of “fear barometer.” But its price is volatile, and its predictive value is questionable. Still, it earns its reputation as a “safe haven” asset when financial conditions deteriorate badly. Gold is up about 17% since the beginning of June, and 29% year to date, as nervous traders rediscover its “safe haven” appeal during the COVID-19 pandemic crisis.

If you’re truly nervous about global business and financial conditions, it doesn’t hurt to have a small allocation to gold as a store of value and a cushion against troubled times. But bear in mind that gold is also a non-productive asset – it has no yield and produces no income. The only growth available is through capital gain, and that depends entirely on the vagaries of the commodity markets. When you buy gold in the hopes of selling it later at a profit, you are speculating, not investing.

There are a couple of reliable ways to buy gold.

* Bullion, certificates, and coins. Buying the physical commodity and locking it up in a safety deposit box is the most straightforward way of buying gold. But bear in mind that you’ll incur transaction (or “bar”) charges and safekeeping costs.

* Gold funds. You can purchase units of an exchange-traded fund (ETF) that holds nothing but gold bullion such as iShares Gold Bullion ETF (TSX: CGL) or U.S.-based SPDR Gold Shares (NYSE: GLD). ETFs are the most economical way to hold physical gold, and most investors go this route.

Speculating versus investing

There’s an undeniable appeal in buying a haven asset like gold as a crisis hedge. But making it a major portfolio allocation could be a mistake. Unlike a stock or a bond, where you expect the asset to produce a return in the form of interest or dividends, gold provides no return at all. You essentially hope that you can sell your commodity down the road to someone who’s willing to buy it at a higher price than you did and pocket the capital gain. Will there be such buyers down the road? No one knows. When you purchase these types of assets, you’re betting that there will be. And note the key word there: “betting.” In other words, you’re speculating.

In addition, by buying, selling, rebalancing, and reallocating your portfolio into larger allocations of haven assets like gold, you’re not only generating costs in the form of brokerage commissions, but you may very well be inadvertently accumulating a hefty tax bill on the various buys and sells of your investments through the year. It all takes a sizeable chunk out of your investment returns and puts it in someone else’s pocket. There’s probably no other activity in the world where individuals will so eagerly perform a robbery on themselves.

So before you take the plunge and switch a larger-than-nominal portion of your portfolio to gold or other supposedly safe haven assets, step back from the daily noise of the trading screen and ask yourself:

* Is it tax efficient? Am I attracting maximum tax with every transaction or am I minimizing the tax hit? Am I maximizing my use of Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans?

* Is it low cost? Am I using investment strategies that reduce my overall trading, transaction, and management costs, such as allocating at least some portion of my asset mix to low-cost exchange-traded funds?

* Am I mitigating risk? Am I diversifying my portfolio with enough non-correlated asset classes to suit my tolerance for risk? Am I using hedging or income-generating strategies with options? Or am I essentially “throwing darts” every day, and hoping for the best?

Gold can be a comfort in troubled times. But if overdone, it can become distinctly uncomfortable weight in your portfolio (gold is, after all, one of the heavier metals), and a drag on future performance.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.