Precious metals, gold, silver reach record high in Pro Aurum KGThank you for reading this post, don't forget to subscribe!
By Julie Cazin with Andrew Dobson
Why: Is it wise to invest some savings in gold? If so, what is a good gold exchange-traded fund (ETF), and what percentage of my holdings should be invested there? I am 50 years old, so how do I know which gold ETF is right for me? – Mary
FP Answer: Gold is a precious metal that has been a form of currency since ancient civilizations. Until the last century it was also considered the standard basis of the international monetary system. Before 1914, the Canadian dollar was pegged to the price of gold and was convertible into gold on demand.
Today, gold as an investment takes many shapes and forms and there is renewed interest in it among market participants as the price of spot or one ounce gold bullion continues to rise to an all-time high of US$2,135 on December 4. Has reached. , 2023.
In your case, Mary, it is important to review the rationale for investing in gold to determine if it is a good fit for your portfolio. Given that gold is a single asset class, it is considered to be higher at risk due to the volatility inherent in tracking a single asset versus a basket.
Gold is generally used as a hedge for a portfolio, not as an asset to be held “just long enough” to earn returns. On an inflation-adjusted basis, the price of gold is lower today than it was in the early 1980s. However, in fairness, gold has performed very well over the past 20 years since bottoming out when the tech bubble burst.
“The problem with commodities is that you are betting on how much someone else will pay for them in six months. Warren Buffett once famously said of gold, “The commodity itself is not going to do anything for you.” “Buying a lump of something and hoping that someone else will pay you for that lump from now on Buying something that will pay off more after two years than something that you expect to generate income over time is a completely different ball game.”
Gold is used as a hedge because its price is generally not expected to move directly in line with the broader capital markets. It has provided positive returns during the last five recessions in the United States. It exists in a limited supply and is attractive when central banks are printing money and potentially devaluing currencies.
Investors will sometimes include a small allocation of gold in their portfolio for risk diversification. The value of this allocation may be to provide some upside return potential for a portion of the portfolio when other portions are not performing.
The classic example you may hear is that “gold is inversely related to the stock market,” meaning that when stock markets go down, we should expect gold to act differently when it goes up. When used this way in a small allocation, gold can help improve the investing experience in terms of reducing overall portfolio volatility.
Unfortunately, Mary, gold has acquired somewhat of a reputation due to very aggressive proponents – the so-called gold bugs – pushing to invest in it as a primary asset class. I would caution against having a high allocation in your portfolio to any one investment, especially commodities, as they can be speculative and volatile. The same rule will apply to buying shares of penny stock.
When selecting a gold ETF, you have access to Canadian- or US-listed ETFs at all major brokerages. There are many options, so you should review factors such as whether you want to own gold bullion or gold stocks, embedded management expense fees, and other factors to determine the right fit. This does not depend solely on performance as each ETF will have its own set of unique considerations.
For example, the largest physically-backed gold ETF in the world is the SPDR Gold Trust, which tracks physical gold bullion prices. BlackRock Inc. K iShares, Sprott Inc. and Purpose Investments Inc. Canadian ETF issuers also trade gold bullion funds on the Toronto Stock Exchange. The iShares S&P/TSX Global Gold Index ETF provides global exposure to stocks of gold producers, so you’re buying gold stocks instead of gold bullion.
Keep in mind that if you invest in a US-listed gold ETF, it may incur currency conversion costs, increased Canadian tax reporting requirements for taxable accounts or you may face US estate taxes upon death.
Should you invest in gold? In my experience, very few investors do this. But if you do, Mary, consider some of the factors above and use it primarily as a hedge as opposed to a primary asset class.
Andrew Dobson is a fee-only, advice-only Certified Financial Planner (CFP) and Chartered Investment Manager (CIM) at Objective Financial Partners Inc. in London, Ontario. He does not sell any financial products. He can be reached at [email protected].
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