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Have You Been Bitten By The Gold Bug?

By Andy Willms, President & CEO


The latest gold rush is on. The low interest rates being paid on fixed income investments, the economic uncertainty brought on by the Covid-19 pandemic, and growing inflation fears triggered by massive government deficits that have resulted from effort to ward off another Great Depression have combined to create a surge in the demand for gold.

Another key and arguably the dominant driver of gold’s rally: negative real yields, which tend to move inversely with the metal’s price. The 10-year inflation-indexed 10-year Treasury note, for example, traded at -0.79% this week (July 16).

It all adds up to a bull run for gold. Since the start of 2020, the precious metal has risen by approximately 19%, which equates to an annualized gain of almost 36%.

The debate about the merits of gold as an investment has always been a hot one. Historically, gold has dramatically underperformed both stocks and bonds, which is a major drawback to including it in a passively managed portfolio. Gold has also lost much of its intrinsic value, and does not generate any income. As a result, you have to sell gold to make a profit on it.

Gold supporters point to the fact that gold has been an effective store of value when stocks take a nose dive or the economy hits the skids. Gold also retains its purchasing power better than currency or currency-based assets when the value of the dollar drops and also when inflation is rampant. Many people (and countries) see it as money, without the complications of a central bank or government intervention - a distinction that’s highly prized in some circles.

For individuals, deciding if gold belongs in your portfolio depends on your investment approach. If you are an active investor who believes you can successfully time the market and predict where the economy is heading, then you may want to buy and sell gold depending on what you expect to happen next.

If, on the other hand, you are like me and question your ability to outsmart the market or foretell the future, then I suggest staying out of the gold mine.

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