Gold as portfolio insurance, Part 2. Four options.


bullion gold gold bars golden

The issue with owning physical gold.

When I first looked into buying gold, I thought about physical gold, but soon discovered that it was a real pain to own. Where to store it for example. In addition, gold coins and small bars are sold at a heavy markup to the actual gold contents. And a standard gold bar weighs about 400 ounces which would be worth USD 668,000 (CAD 940,845) at todays price, which is a bit much to have hanging around the house.

Physical gold does have its adherents. While posted in Hong Kong in 1999, I got a call from a wealthy Hong Kong businessperson that I knew. He had a couple of gold bars in a safety deposit box in a bank in Toronto, stashed there before the handover to China in 1997, and felt that it was time to cash it in. The property market in Hong Kong was hot at the time and the stock market pre 2001 was booming. But obviously he was a tad concerned about strolling up to the teller window and asking for his gold  to be converted into Canadian currency. I arranged for him to meet the manager of the Hong Kong branch of the bank, who was more than happy to facilitate the exchange, and meet a bona fide billionaire at the same time.

Gold owning options

For us non billionaires, there are a number of easier options available. The simplest and still secure method for Canadians is to buy units of the Royal Canadian Mint’s Gold Reserves Exchange Traded Receipt  (ETR, similar to an ETF) symbol MNT. I mean, if you can’t trust the Government of Canada to manage its finances, who can you trust ? This tracks the price of gold converted to Canadian dollars and actually holds the gold for the unit holder. It is listed and traded on the TSX. For those living in or visiting Ottawa, you could potentially do a tour of the Mint  on Sussex Drive (once it reopens) and ask to see your holdings.

For those with US dollars available, a similar product is the Spyder Gold Shares ETF symbol GLD. It is listed and traded on the NYSE.

For those willing to take on more risk, the I Shares Global Gold ETF symbol XGD is sold in CAD on the TSX. It contains the stock of 37 gold mining companies, including all of the biggies such as Newmont and Barrick. The gold mining stocks tend to do better then actual physical gold when the price goes up, as every dollar increase in the price of gold is pure additional profit for them, and therefore one gets the benefit of leverage. On the other hand, when the price of gold goes down, they will decline faster. 

One final option is Franco Nevada, symbol FNV, which is a royalty streaming company listed on both the TSX and the NYSE, so it can be bought in both CAD or USD. Royalty streaming companies are a bit like venture capital companies for the mining industry. They invest at an early stage in potential mines, often when no one else will take the risk, and in return receive a percentage of each ounce of gold produced. They do not operate mines and have very low overhead, and therefore have less risk than gold mining companies. FNV currently has royalty streams from 60 producing mines.

Here are the returns for each of the four options:

Symbol             1 yr return %           3 yr total return %

GLD (USD)             36                                             37

MNT (CAD)            45                                             46

XGD (CAD)             68                                             44

FNV (CAD)             88                                             92

Note that most of the return has come in the last 12 months, as the world recognized that economies were slowing and then of course came the Covid crash. Over this 12 month period the price of gold has gone from USD 1280 to USD 1680 today, a 31% increase in USD and about 37% in CAD (because the Loonie dropped by about 6% over the same period.

Here is an important caveat. Both XGD and FNV are at risk of reduced revenues due to temporary mine closures due to Covid 19. So while both have done well over the past three years, and particularly over the past year, both are at risk of having their revenue streams interrupted for however long it takes the world to conquer the virus.

On the other hand, mine closures combined with an increased demand for gold as a safe haven asset may continue to drive up the price of physical gold. A number of top investment strategists such as Ray Dalio, CIO of the worlds largest hedge fund Bridgewater Associates, and David Rosenberg, see gold hitting USD 3000 over the next few years. You can read Rosenberg’s analysis here (note that this was written in January, 2020, months before the Covid crisis hit):

Rosenberg – Gold as insurance

For comparison, during the last stock market crash of the Great Financial Recession, 2007-2011, gold went from around USD 800 to USD 1800 over a four year period.

Because gold is priced in USD, it is also good insurance against the possibility of a further decline in the Loonie – but that is a discussion for another day.

Finally, please remember to do your own due diligence and talk to your adviser to see if gold is right for your portfolio. This blog site does not provide personal investment advice and cannot provide individuals with specific investment ideas, nor does the author claim to have a crystal ball regarding the future price of gold.

Disclosure: The author owns shares/units of FNV, GLD and MNT.

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