Investing in gold to diversify your placements

Investing in gold to diversify your placements
National Bank Invest, Personal Invest, Personal

Investors have access to a wide array of financial products to diversify their portfolios. Based on your medium- and long-term objectives, does it still make sense to invest in gold?

When the stock market crashes, gold is considered a safe haven. In other words, when stock markets fall, a lot of people invest in gold to minimize the damage. They essentially take “haven” in gold. Why? Because in tough times, the value of gold remains steady and, as a general rule, even goes up.

That’s not the only advantage. “Gold brings stability to your portfolio during a period of political or financial instability,” explains Sophie Paquet, Investment Advisor at National Bank Financial. “Its value also goes up when the US dollar goes down.”

In the long term, the value of gold also follows inflation rates, enabling you to maintain your purchase power over time. The opposite is true for a one-dollar bill that you keep stashed away in your piggy bank: The more time that passes, the less that dollar bill will buy you.

The downside

Celebrity investor Warren Buffet has argued that gold is a bad investment, mostly because it doesn’t generate interest or dividends. And he’s not the only one that sees things this way.

“For someone looking to generate revenue, gold isn’t ideal,” says Paquet. “In the long term, the value of gold generally goes up less than the financial markets. Historically, depending on the period of time, the return on gold has usually lagged far behind.”

For example, gold performed better than the markets if you look at the last 45 years. “But in the last 30 years, the price of gold only went up by 335%, whereas the Dow Jones Industrial Average (DJIA) went up by 1,255%,” says Paquet.

Investing in gold also isn’t as secure as its title of “safe haven” may suggest. Gold remains a very volatile product in that its value fluctuates considerably. “In 2011, the price of one ounce of gold was approximately $1,900,” says Paquet. “Today it’s netting out at a little more than $1,300.”

Should you invest in gold in 2018?

In theory, the best time to invest in gold is right before a stock market crash so that you can buy low and profit from the subsequent rise in value. The problem is that it’s very risky to try to predict such an event.

“Even Ben Bernanke, the former president of the Federal Reserve, said that he wouldn’t risk predicting the short-term price of gold. You really have to see it as a way of diversifying your portfolio in the long term,” says Paquet. The objective is to avoid putting all of your eggs in one basket to mitigate risk.

Though it’s difficult to make predictions, investing in gold today can be a good idea. “In 2018, our analysts are forecasting only a slight increase in the price of gold,” says Paquet. “But having a small percentage of gold in your portfolio can be interesting. Geopolitically speaking, there is a certain amount of insecurity in the world right now. Analysts are expecting inflation rates to rise, which is also good for gold.”

That said, gold should take up only a small part of your portfolio to ensure that you don’t hinder your returns. “In general, we recommend no more than 1% to 5% of gold in a portfolio,” says Paquet.

It’s important not to lose sight of your objectives either. If you’re saving up in the short term—for a down payment on a house or to finance a trip, for example—gold isn’t the way to go. You’d be far better investing in a less volatile product.

How do you invest in gold?

You don’t have to pay your jeweller a visit to invest in gold. Your best bet is to meet with your investment advisor or use a direct brokerage platform. There are three main ways of investing in gold:

  • Buy gold bars: You can do this with the Royal Canadian Mint. “It’s not very practical,” says Paquet. “It’s more difficult to store and the fees to do so are high.” An investment like this is also less liquid in that it’s more complicated to sell should the need arise.
  • Invest in a gold mining company: “You can invest in gold producers or in gold mining companies listed on the stock market,” says Paquet. “It’s important to make sure that these companies have diligent teams. They also have to have a strong track record and a healthy balance sheet.” These are the types of verifications that analysts at financial institutions are accustomed to doing. It can be difficult for an independent investor to carry out such a check and the risk of making a mistake is high.
  • Invest in exchange-traded funds or specialized mutual funds: “The idea is to purchase a fund that focuses on (ALT: invests in) gold or gold mining companies,” explains Paquet. Each fund has stocks (ALT: securities) in different companies, so the risk is lower. If one of them doesn’t perform as well, the others will make up for it.

Investing in gold has its pros and cons. It’s important to be well informed before deciding if gold is right for you. As with any of your investments, you should always keep your objectives and your investor profile in mind. Your financial advisor can take you through some potential scenarios and help you avoid mistakes that can occur when you handle investments on your own.

Edited on 14 May 2018

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